Euro zone yields nudge up as investors wait for Fed decision

By Amanda Cooper and Alun John

LONDON, July 30 (Reuters) - Euro zone government bond yields inched higher on Wednesday, tracking a rise in U.S. Treasury yields after data showed the U.S. economy rebounded in the second quarter and the Treasury announced its quarterly refunding plans.

All eyes were on the U.S. Federal Reserve, which is expected to keep interest rates on hold later in the day, while investors continued to take stock of the European Union's trade deal with the United States and a hefty fall in the euro this week.

German 10-year yields DE10YT=RR, which serve as the benchmark for the wider euro zone, were last up just over 1 basis point at 2.70%.

Analysts at Deutsche Bank said in a note that late July and August is traditionally a strong period for government bonds, partly due to a seasonal lull in corporate issuance which results in excess cash being temporarily parked in sovereign debt.

This would then be reallocated in the September "back-to-school" issuance wave, they added.

However, with the EU's trade deal with the U.S. removing the risk of a full-blown trade war, they see Germany's 10-year yield eventually rising above 3%.

The Fed will announce its rate decision after the European market close. Investors will be carefully watching U.S. President Donald Trump's reaction as he has been piling pressure on the central bank to cut rates.

Euro zone economic growth data showed the single currency bloc proved more resilient than expected in the second quarter, expanding by 0.1%, against forecasts for no growth, which suggested businesses are adapting to the uncertainty around trade.

"Despite uncertainty prevailing in the first half of the year, combined (euro zone) growth in the first two quarters has not disappointed," said Bert Colijn, ING chief economist, Netherlands.

"For the short term, don’t expect miracles, but at the same time, there are new signs of life starting to emerge for the euro zone economy."

This growth picture, combined with inflation hovering around the European Central Bank's 2% target, means traders have been whittling away their bets on another European Central Bank rate cut this year.

Germany's rate sensitive two-year yields DE2YT=RR were up 2 bps at 1.93%.

Other government bonds largely moved in line with the German benchmark, helping keep spreads tight.

Italy's 10-year yield was up just over 2 bps at 3.55%, leaving the gap over the German equivalent at just 82 bps. IT10YT=RR, DE10UT10=RR

The gap between French and German 10-year yields was last at 65 basis points, having closed just above 63 bps on Tuesday, the tightest since the volatility around France's election last year. DE10FR10=RR