Euro zone bond yields slip ahead of ECB policy rate decision

By Linda Pasquini

June 5 (Reuters) - Euro zone bond yields fell on Thursday after a muted start to the session, with markets expecting an interest rate cut from the European Central Bank later in the day.

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

"We assume that the ECB will leave the door open for further rate cuts, while at the same time emphasising its dependence on data," analysts at Frankfurt-based Metzler wrote in a note to clients. "With a slightly dovish overall impression, the euro yield curve could shift slightly lower."

Germany's 10-year yield DE10YT=RR, the benchmark for the euro area, fell 3 basis points to 2.49%, hovering around its lowest levels since May 8.

Germany's policy-sensitive two-year yield DE2YT=RR was little changed at 1.784%, within its recent tight range.

The ECB has cut rates seven times in 13 months, as inflation eased from post-pandemic highs, seeking 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.

The central bank is expected to cut at least one more time by the end of the year, bringing the deposit facility rate to 1.75%, but markets are factoring in only a 30% chance so far for that cut to come at the ECB's July meeting.

"Whether the ECB will cut interest rates again in July, as we are forecasting, will ultimately depend above all on the development of the U.S. trade war and U.S. negotiations, especially with the EU," Metzler analysts said.

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, was down 4.5 bps at 3.455%, its lowest since February 10, leaving the gap between Italian and German yields DE10IT10=RR at 93.8 basis points.

Euro zone data on Thursday showed a larger than expected decline in producer prices in April compared to the previous month, helped by lower energy prices.