German 10-year yield at 3-month low as bonds retain support

Germany's 10-year yield fell to a new three-month low in quiet trading on Friday as markets sought direction ahead of next week's European Central Bank meeting.

In the absence of major euro area data releases on Friday, and with ECB policymakers entering their silent period ahead of next Thursday's meeting, analysts said government bond yields would be driven by news around the coronavirus.

"The spread of the more infectious Delta variant is the key emerging threat for the time being, with COVID-19 cases on the rise again at the global level and in most of the G7 economies," Deutsche Bank strategist Jim Reid said.

On Friday, Germany's 10-year yield, the benchmark for the bloc, fell a basis point to -0.347%, the lowest since April 8.

Italy's 10-year yield was down similarly to 0.72%, with the closely watched premium it offers over 10-year German bond yields at 105 bps. It has struggled to hold below 100 bps this week.

German industrial orders fall unexpectedly in May

German and Italian government bond yields were set to end the week lower for the third week in a row. Dovish commentary from US Federal Reserve chairman Jerome Powell this week pushed yields down further, adding to last week's sharp rally, when bets against rising US Treasury yields were unwound with growth assumptions coming under question.

Analysts expect euro area bond yields to remain suppressed in the weeks ahead, given the supply outlook for the bloc.

UniCredit analysts expect debt management agencies to issue around 50 billion euros in the next four weeks, half of the issuance over these last four weeks, which will be more than offset by upcoming redemptions and coupon payments.

"With supply slowing down noticeably and net issuance about to turn decisively negative over the next couple of weeks, the hunt for yield looks set to continue, then also capturing non-core curves again, as long as the ECB does not fail to deliver," Christoph Rieger, head of rates and credit research at Commerzbank, said.

German exports rise, approaching pre-pandemic levels

In data, the final June euro zone inflation reading came in at 1.9% year-on-year, slowing from 2% in May and confirming an initial estimate.

In the United States, retail sales figures are due at 1230 GMT and consumer sentiment data from the University of Michigan is expected at 1400 GMT.

Later on Friday, Fitch Ratings will review Greece's credit rating, currently at two notches below investment-grade territory with a stable outlook.