Euro zone bond yields rise as ECB signals rate cuts nearly done

By Linda Pasquini and Samuel Indyk

June 5 (Reuters) - Euro zone bond yields turned higher on Thursday after European Central Bank chief Christine Lagarde hinted that the easing cycle could be coming to an end, after its eighth rate cut since June last year.

The ECB lowered its deposit rate by 25 basis points to 2%, in line with expectations, having now reduced the rate by a combined two percentage points over the last 12 months.

With inflation back at target , investors were watching for clues on the future path for interest rates.

The outlook for further rate cuts took a hit after Lagarde said the ECB was in a " good place ", suggesting the central bank could wait before lowering borrowing costs further, even though she denied this was confirmation of a pause.

"Today's communication is rather suggesting that they might prefer to take a pause in July and wait for more data, wait for more clarity on trade negotiations, and also wait for the next round of staff projections in September," said Jussi Hiljanen, chief rates strategist at SEB.

Money market traders scaled back bets for rate cuts and were now pricing in just 25 basis points of easing by year-end, from around 30 basis points before the press conference began.

Futures imply just a 12% chance of a rate cut in July, from about 30% before the press conference.

Germany's two-year yield DE2YT=RR, which is sensitive to changes in monetary policy expectations, was up 6.5 basis points at 1.86%, having been slightly lower before Lagarde's press conference.

Germany's 10-year yield DE10YT=RR, the benchmark for the 20-nation euro zone, was last up 3 basis points at 2.555%, having earlier hit 2.476%, its lowest since May 8.

The central bank also lowered its inflation and growth projections as U.S. President Donald Trump's trade war continues to impact the global economy.

"A further escalation of trade tensions over the coming months would result in growth and inflation being below the baseline projections," the ECB said in its statement.

The European Union and the U.S. remain in talks about a potential trade agreement.

Italy's 10-year yield IT10YT=RR, the benchmark for the euro area periphery, was up 3.5 bps at 3.533%, having earlier hit its lowest since February 10 at 3.443%. The gap between Italian and German yields DE10IT10=RR stood at about 95 basis points.

Meanwhile, data on Thursday showed a larger-than-expected decline in euro zone producer prices in April compared with the previous month, helped by lower energy prices.