Euro zone bond yields muted ahead of ECB policy rate decision

By Linda Pasquini

June 5 (Reuters) - Euro zone bond yields were little changed on Thursday as markets eyed an expected interest rate cut from the European Central Bank later in the day.

With the ECB widely expected to cut rates by 25 bps to 2%, investors will focus on any indication of what comes after.

The market still anticipates at least one more cut by the end of the year, bringing the deposit facility rate to 1.75%, but it is factoring in only a 30% chance so far for a cut at the central bank's next meeting in July.

"A downwardly revised inflation projection and a balance of risks around the growth outlook, perhaps more clearly pointing to the downside, would generally paint a dovish backdrop, but given the uncertain environment around trade specifically, one should not expect any concrete hints from President Lagarde," analysts at ING wrote in a note to clients.

Germany's 10-year yield DE10YT=RR, the benchmark for the euro area, was mostly flat at 2.52%. It fell to its lowest since May 8 on Tuesday at 2.485%.

Germany's policy-sensitive two-year yield DE2YT=RR was also unchanged at 1.79%, within its recent tight range.

The ECB has cut rates seven times in 13 months, as inflation eased from post-pandemic highs, as it sought to support a euro zone economy that was struggling even before U.S. President Donald Trump's erratic economic and trade policy came into the picture.

Markets have been rattled since Trump announced a slate of tariffs on trading partners around the globe on April 2, only to pause some and declare new ones, pushing investors to look for alternatives to U.S. assets.

Italy's 10-year yield IT10YT=RR, the benchmark for the euro area periphery, slid 2 bps at 3.482%, leaving the gap between Italian and German yields DE10IT10=RR at 93.6 basis points.