Euro zone yields dip with Ukraine talks, US-China trade in focus

By Amanda Cooper and Stefano Rebaudo

Aug 11 (Reuters) - Euro zone government bond yields edged lower on Monday ahead of a week packed with event risk, including a Ukraine summit between the United States and Russia and a deadline on a U.S.-China trade truce, as liquidity evaporates.

U.S. President Donald Trump and Russian President Vladimir Putin will meet on Friday in Alaska to try to broker peace in Ukraine, the first in-person meeting between a U.S. and Russian leader since former President Joe Biden met Putin in 2021.

Meanwhile, a 90-day truce in the trade war between the U.S. and China expires on Tuesday. Traders widely expect the pause to be rolled over for another 90 days.

German 10-year yields DE10YT=RR were down one basis point at 2.68%, having ended last week up 1 basis point. So far this month, yields on Bunds, which serve as the benchmark for the wider euro zone, have barely budged.

Two-year yields DE2YT=RR, which tend to be most reactive to changes in expectations for interest rates, were down 0.5 bp to 1.95%. They ended last week with a 5-bp rise, as investors unwound bets on European Central Bank rate cuts.

Analysts argue that with the ECB’s on-hold bias tempering the impact of near-term developments, euro rates are increasingly likely to take their directional cues from the U.S., where data will be pivotal for Federal Reserve pricing.

Benchmark 10-year Treasury yields US10YT=RR were down one bp at 3.75%.

"Against the backdrop of continued trade rumblings and geopolitical tensions, attention will be diverted by the release of the U.S. CPI inflation data on August 12," said Jane Foley, strategist at RaboBank.

"Signs of weakness in the U.S. labour market have boosted expectations for a Fed rate cut in September, though these forecasts are being clouded by the debate about whether the drop in job applications is a function of slowing supply or weaker demand on the back of Trump immigration policies," she added.

U.S. Treasury yields plummeted in early August as data prompted investors to increase bets that the Fed will kick off a new easing cycle next month.

Commerzbank noted euro zone bond supply this week was expected to be the smallest so far this year, with just a re-opening of German 10-year Bunds and Finnish 10- and 15-year government debt.

Italy has cancelled auctions of 3-year, 7-year and ultra-long debt, while Portugal will also stay put, strategists at the bank said.

Elsewhere, 10-year Italian yields IT10YT=RR were down 1 bp at 3.496%, while French 10-year yields FR10YT=RR were steady at 3.388%.