European bond yields dip ahead of Jackson Hole summit

By Joice Alves

LONDON, Aug 20 (Reuters) - Euro zone government bond yields dropped on Wednesday, moving away from this week's multi-month high, as traders positioned ahead of a gathering of global central bankers later in the week.

Germany's 10-year bond yield DE10YT=RR, the euro zone benchmark, was down 4 basis points at 2.71%, after hitting a 4-1/2 month high of 2.787% on Monday.

Longer-dated yields have been moving higher in Europe, and around the world, but the selloff paused for breath on Wednesday, as the euro zone saw some spillover from a more than 6 bps fall in Britain's 10-year yield after UK inflation data that, while high, was insufficient to push already elevated British yields higher.

Germany's two-year yield fell 3 bps to 2.71%. DE2YT=RR

Investors were also preparing ahead of the annual symposium of global central bankers in Jackson Hole, Wyoming, and after talks in Washington on ending Russia's war in Ukraine.

The focus of the event will be on what Federal Reserve Chair Jerome Powell will say on Friday about the near-term outlook for rates.

"We have (seen) this very large move higher in yields, and I think everyone is sort of now waiting and looking for what Powell will say in Jackson Hole," said Evelyne Gomez-Liechti, multi-asset strategist, at Mizuho International.

She expected Powell to continue to stress the wait-and-see mode as jobless claims in the U.S. were stable and unemployment has risen only moderately, while service inflation has picked up.

"I do think that Powell will sound a bit more patient and a bit more hawkish versus what other Fed members have been talking," she said.

The importance of the U.S. economy means changes in Fed rate expectations often influence other bond markets.

Money markets are almost fully pricing in a quarter-point rate cut at the Fed's September 16-17 meeting. The Fed policy rate has been in the 4.25%-4.50% range since December.

In the meantime, futures point to the European Central Bank holding interest rates at 2% at its September meeting.

FRANCE'S POLITICAL STORY

The spread between Italy's 10-year bond yield and its French equivalent was also in focus. It has narrowed to levels last seen two decades ago as France faces political instability and heads to discuss its budget. The spread was last at around 13.5 bps.

"For me, France is a political story," Gomez-Liechti said. "Prime Minister [François] Bayrou is very ambitious in his wish to consolidate, fiscally speaking. But I think his ideas are not going to go down very well with either the left or the right. So I think there is risk of some sort of no confidence motion coming through."

France's 10-year yield FR10YT=RR was down 3 bps at 3.41%, having hit a four-month high of 3.468% on Monday.

Markets were largely unmoved by Germany's mixed response to its auction of a total of 1.896 billion euros ($2.21 billion) in 30-year bonds.

Italy's 10-year bond yield IT10YT=RR was 3 bps lower at 3.55%, keeping the spread between Italian and German 10-year yields at 83 bps.