Euro zone yields mixed before central bank meetings and data, US-China talks in focus

By Stefano Rebaudo

LONDON, Oct 28 (Reuters) - Euro zone government bond yields were mixed on Tuesday as investors remained cautious over a possible U.S.-China trade deal and awaited central bank decisions later this week.

China hopes the United States can meet it halfway to "prepare for high-level interactions" between the two countries, Foreign Minister Wang Yi told U.S. Secretary of State Marco Rubio in a phone call on Monday.

The U.S. Federal Reserve wraps up its two-day policy meeting on Wednesday, and rate decisions from the European Central Bank and the Bank of Japan are due on Thursday.

Euro area borrowing costs jumped last Friday after strong Purchasing Managers' Index readings, while traders priced in slightly less than a 50% chance of another ECB rate cut next year.

Investors are now awaiting key euro area inflation data later this week, which could influence expectations for future ECB policy moves.

Germany’s 10-year Bund yields were flat at 2.62%, after dropping one basis point (bp) the previous day.

Money markets priced in a 52% chance of a 25-basis-point ECB rate cut by September EURESTECBM8X9=ICAP. The key rate is seen at 1.90% in December 2026 EURESTECBM10X11=ICAP from the current 2%.

Germany’s 2-year yields DE2YT=RR, more sensitive to expectations for the ECB policy rate outlook, were roughly unchanged at 1.98%.

The yield gap between safe-haven Bunds and 10-year French government bonds DE10FR10=RR - a market gauge of the risk premium investors demand to hold French debt - was at 80 bps.

The spread hit 87.96 bps in early October, its widest since January, driven by investor concerns over France’s fiscal trajectory.