Euro area bond yields on track for two straight weekly rise after Fed, ECB

By Stefano Rebaudo

Oct 31 (Reuters) - Euro zone government bond yields were on track for a second straight weekly rise following a hawkish signal from the Federal Reserve and an uneventful European Central Bank meeting.

The ECB kept interest rates unchanged at 2% and reiterated that policy was in a "good place" as economic risks recede and the euro area shows continued resilience in the face of uncertainty.

Euro zone borrowing costs rose last Friday after traders digested stronger-than-expected purchasing managers' index readings.

Germany’s 10-year Bund yields DE10YT=RR, the euro area's benchmark, were up one basis point (bp) at 2.65%. They were set for a weekly increase of 2 bps, after climbing 4.5 bps the week before.

"We tend to agree with the (ECB's) governing council majority view that the risk to the medium-term inflation outlook remains broadly balanced," Konstantin Veit, portfolio manager at PIMCO, said.

"The ECB’s reaction function is not geared towards fine-tuning policy, and we continue to expect a prolonged period of inaction on policy rates," he added.

Traders trimmed bets on future ECB rate cuts early on Thursday after the Fed meeting, with market positioning holding steady following the ECB’s policy statement and comments from its president, Christine Lagarde.

Money markets were pricing in an about 50% chance of a 25-basis-point ECB rate cut by September, EURESTECBM8X9=ICAP from around 70% last Friday before PMI data was released. The key rate is seen at 1.90% in December 2026 EURESTECBM10X11=ICAP from the current 2%.

The ECB must keep its options open for interest rate moves at upcoming meetings to react to risks, including from financial markets, ECB policymaker Francois Villeroy de Galhau said on Friday.

Bund yields were also about to record a monthly decline of 7 bps, as mounting concerns over the economic fallout from U.S.-China trade tensions revived bets on another ECB rate cut and dragged borrowing costs lower earlier in the month.

U.S. President Donald Trump said on Thursday he had agreed with President Xi Jinping to trim tariffs on China in exchange for Beijing cracking down on the illicit fentanyl trade, resuming U.S. soybean purchases and keeping rare earths exports flowing.

"On U.S. China, a broad agreement is a short-term positive," Mohit Kumar, an economist at Jefferies, said.

"But our view remains that medium term, both the U.S. and China would seek to reduce dependence on one another," he added.

Germany’s 2-year yields DE2YT=RR, which are more sensitive to expectations for the ECB policy rate outlook, were roughly unchanged at 1.99%.

Euro zone inflation slowed a touch in October and continued to hover near the ECB's 2% target.

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