By Marius Zaharia and Ana Nicolaci da Costa
LONDON Dec 27 (Reuters) - German Bund prices fell on Friday as further signs of improvement in the U.S. economic outlook reinforced expectations that the Federal Reserve will steadily withdraw its bond-buying stimulus next year.
Data on Thursday showed a fall in U.S. jobless claims and a rise in holiday retail sales, prompting more weakness in Bunds and Treasuries, which have been under selling pressure since the Fed said last week it would start trimming asset purchases in January.
Bund futures were 79 ticks lower at a settlement close of 138.96. In the United States, 10-year T-note yields rose to their highest since July 2011 at 3.02 percent before moving to just below 3 percent.
"Better data in the United States is spilling over into Europe," said Olle Holmgren, an analyst at SEB.
Thin trading volumes due to the year-end holidays exacerbated market moves. The turnover in Bund futures was around 202,000 lots, a fraction of a daily average of about 680,000 lots. One lot represents 100,000 contracts.
With the euro zone crisis abating and the U.S. recovery seemingly gathering speed, some analysts predict U.S. yields will rise further next year.
"U.S. (yields) can easily go to 3.10 (percent) before they really see some buying there to stabilise them but Bunds, I don't see them going above 2 (percent)," Kevin Rettberg, analyst at Commerzbank said.
Anders Svendsen, chief analyst at Nordea, said while U.S. yields could continue to grind higher, there was a "huge difference" between the United States and the euro zone.
"In the euro zone we need more confirmation that the recovery is on track before we see Bund yields significantly above 2 percent," he said.
Svendsen also said the European Central Bank would attempt to support the economic recovery by being "extremely dovish" in a bid to decouple euro zone yields from their U.S. peers.
Italian 10-year yields were 4 basis points higher at 4.22 percent as investors made room in their books for the last debt sales of the year.
"There was supply in Italy, that may have weighed a bit on the market," one trader said.
Italy sold 8 billion euros of six-month bills and 2.6 billion euros of two-year, zero-coupon bonds in an auction that saw its borrowing costs creeping higher compared with previous sales, mainly due to a seasonal fall in demand.
On Monday it will offer up to 5.5 billion euros of five- and 10-year bonds.