Euro zone bond yields edge up in muted trading

By Ozan Ergenay

LONDON, Nov 27 (Reuters) - Euro zone bond yields steadied in early trading on Thursday, set for a second straight weekly decline, as activity across most markets thinned out in light of the U.S. Thanksgiving holiday, while investors increasingly bank on a December rate cut by the Federal Reserve.

Germany's 10-year Bund yield, the euro zone's benchmark, rose 1.1 basis points to 2.685%, DE10YT=RR, while French 10-year yields held at 3.41% FR10YT=RR and Italian yields IT10YT=RR were up 1.7 bps at 3.411%.

With the European Central Bank firmly on hold, European rates have been fairly muted in recent weeks. Spillovers from moves in stocks or U.S. and Japanese government bonds have not been sufficient to drive significant shifts either.

Later on Thursday, the ECB will release the minutes of its October policy meeting, while a number of the central bank's officials are scheduled to speak.

Euro zone bond yields have diverged sharply from those in the United States this month, as investors are pricing in a series of Fed rate cuts over the coming year, while the ECB is not expected to change monetary policy, according to money markets.

Bund yields have risen by around 5 bps this month, while 10-year U.S. Treasury yields US10YT=RR have fallen 10 bps, bringing the two closer together than at any time in nearly two years DE10US10=RR.

Major U.S. economic data for retail sales and producer prices published on Tuesday reinforced expectations of a December rate cut and investors bet the leading candidate to be the next Fed Chair may pursue a more dovish policy.

In the UK, activity was also more subdued after the British finance minister presented a budget on Wednesday that alleviated some concern about the government's long-term finances.

UK 30-year gilt yields GB30YT=RR, which are more sensitive to long-term fiscal issues, were up 2.2 bps at 5.2%, retracing some of Wednesday's near-12 bp drop, the biggest since April, partly as a result of an expected decline in supply in the coming year.