Euro zone bond yields dip; focus on spending plans, ECB policy

By Samuel Indyk

LONDON, June 26 (Reuters) - Euro zone bond yields fell slightly on Thursday after rising the day before, as markets weighed worries about rising fiscal spending against the outlook for monetary policy.

Germany's 10-year government bond yield DE10YT=RR, the euro zone's benchmark, was last down 1 basis point at 2.555%, after rising 3 bps the day before. The 30-year yield DE30YT=RR was little changed at 3.07%.

"We're range trading," said Anders Svendsen, chief analyst at Nordea. "I think we should be careful not to over-interpret daily moves."

Investor focus has been on the longer-end of the curve, with expectations that euro area countries, led by Germany, will ramp up borrowing to increase spending on defence.

On Wednesday, NATO leaders agreed to boost spending on defence to 5% of GDP, but some European nations, already running large deficits and seeing debt balloon, may struggle to meet the target.

Germany, which has greater scope to increase spending, published its draft budget for 2025 this week, which included record investments to boost growth.

Germany's two-year yield DE2YT=RR, which is more sensitive to changes in monetary policy expectations, was down 1.5 bps at 1.834%.

The European Central Bank lowered its deposit rate this month but signalled it was done with rate cuts for now after lowering borrowing costs eight times in just over a year.

"I don't think the ECB were that hawkish at the last meeting, but they were clearly saying that unless something happens we are done," Nordea's Svendsen said.

Geopolitics has taken a back seat on Thursday after the ceasefire between Israel and Iran held for now. Oil prices were steady on Thursday.

But there are a number of other key risk events on the horizon.

U.S. President Donald Trump's 90-day pause to reciprocal tariffs ends on July 9 and it remains uncertain what will happen when the deadline passes.

Trump is also pushing Republicans in the Senate to advance his tax-cut and spending bill, which also includes an extension of the debt ceiling. Republican leaders are pushing to get the bill through the Senate and onto Trump's desk before the July 4 Independence Day holiday.

Italy's 10-year bond yield IT10YT=RR was down 2.5 bps at 3.481%, pushing the yield gap between Italian and German 10-year bonds DE10IT10=RR tighter by 2 bps to 91.5 bps.