Euro zone yields edge up before US data, Fed and BoJ meetings in focus

By Stefano Rebaudo

July 29 (Reuters) - Euro zone government bond yields edged up on Tuesday as investors turned their focus to upcoming policy meetings by the Federal Reserve and the Bank of Japan, alongside a slate of key economic data from both the U.S. and the euro area.

Borrowing costs fell on Monday as markets pushed back bets on a 25-basis-point rate cut to March 2026, with economists warning that investors may be overstating the European Central Bank’s hawkish message at last week’s policy meeting.

Sovereign bonds showed a muted reaction to the trade deal between the U.S. and the European Union.

Germany’s 10-year government bond yield DE10YT=RR, the euro area’s benchmark, was up 0.5 basis points (bps) at 2.69%.

Money markets are pricing a 64% chance of an ECB rate cut EURESTECBM3X4=ICAP by December -- with a depo rate seen at 1.84% from the current 2% -- and an 85% probability of the same move in March 2026.

They had priced a deposit rate at 1.73% in December early last week, before the ECB meeting and before a U.S.-Japan trade deal helped ease recession fears tied to a possible trade war.

Data from the U.S. Job Openings and Labour Turnover Survey (JOLTS) is due later in the session, ahead of key employment figures in the coming days.

“Chronically low response rates to the survey, and the impact of artificial intelligence on reported vacancies complicate any interpretation (of the JOLTS data),” said Paul Donovan, chief economist at UBS Global Wealth Management.

“Generally, the U.S. labour market looks fragile, but this is more weakness of hiring rather than firing, which limits consumer damage,” he added.

The Fed is expected to keep its policy unchanged following the conclusion of its two-day Federal Open Market Committee (FOMC) meeting on Wednesday, despite pressure from U.S. President Donald Trump to cut rates.

“The fact that two out of seven members of the Fed board, Waller and Bowman, appear to be on the verge of voting against the majority and in favour of a cut, means that the signals from Fed Chair Powell for interest rates going forward will have less weight,” said Elisabet Kopelman, U.S. economist at SEB.

The Bank of Japan is set to hold off raising interest rates on Thursday but may signal rate hikes later this year, after Tokyo's trade agreement.

German 2-year government bond yields DE2YT=RR – more sensitive to expectations for European Central Bank policy rates – rose 1.5 bps to 1.92%.

Italy’s 10-year government bond yields IT10YT=RR were down 0.5 bps at 3.53%, with the spread between BTP and Bund yields - a market gauge of the risk premium investors demand to hold Italian debt - at 86.5 bps. It hit 82.30 bps last week, its lowest level since April 2010.