Euro zone government bond yields edge down before Fed and BoE policy meetings

By Stefano Rebaudo and Alun John

May 5 (Reuters) - Euro zone government bond yields edged down on Monday with investors on the sidelines ahead of a week packed with policy meetings at central banks including the Federal Reserve and the Bank of England.

A public holiday in Britain contributed to thin trade volumes.

Germany's 10-year yield DE10YT=RR, the euro area's benchmark, fell 0.5 basis points at 2.51%.

The benchmark yield rose around 5 basis points last week, a more modest increase compared with the volatility of early March when it jumped above 2.9% following Germany's dramatic spending plans. Bund yields lost ground afterwards on concerns about the adverse economic impact of U.S. tariffs.

"Bunds are unable to defy the U.S. headwinds, and the curve is steepening as European Central Bank expectations for two more rate cuts remain better anchored," Rainer Guntermann, rate strategist at Commerzbank, said.

U.S. Treasury yields edged down - with the 10-year falling 0.5 bps to 4.31% - after rising to a one-week high on Friday as data showed that employers added more jobs than economists had expected in April,

"Downside in oil prices should help Bunds to stabilise today after the sharp sell-off on Friday, but the long-end appears vulnerable with 10y yields having broken above the 2.5% mark," Commerzbank's Rainer added.

Money markets priced in an ECB deposit facility rate at 1.64% after falling to below 1.55% in mid April after the ECB suggested it was ready to cut rates in response to the potential adverse impact of U.S. tariffs.

Crude prices fell more than 2% on Monday after OPEC+ decided over the weekend to further speed up oil output hikes.

Most economists expect the U.S. central bank to keep rates unchanged this week, but to ease its monetary policy in the near future. Markets price in 115 bps of Fed rate cuts by June 2026.

"We think the most likely timing for the next (Fed) cut is the following meeting in June, but do not anticipate Powell to pre-commit at this stage," Antti Ilvonen, senior analyst U.S. macro at Danske Bank, said.

"By June and July, the Fed will likely have much more clarity on both the final level of China tariffs as well as the future of the other reciprocal tariffs," he added.

Sweden's Riksbank and Norway's Norges Bank are also meeting this week.

Optimism around a potential de-escalation of trade tensions between the U.S. and China affected markets last week, with investors shifting their focus to economic data.

Italy's 10-year yield was down one basis point at 3.62% IT10YT=RR, leaving the spread between it and Germany's Bund yield at 109.1 basis points. DE10IT10=RR