Euro zone bonds struggle for direction after Ukraine talks, eyes on Jackson Hole

By Samuel Indyk

LONDON, Aug 19 (Reuters) - Euro zone government bonds were in a holding pattern on Tuesday as traders looked ahead to a symposium of global central bankers later in the week, and after talks in Washington on ending Russia's war in Ukraine.

NATO Secretary General Mark Rutte told Fox News on Monday that U.S. President Donald Trump's meeting with Ukrainian President Volodymyr Zelenskiy and other European and NATO partners had been very successful.

In a social media post late on Monday, Trump said he had called Russian President Vladimir Putin and begun arranging a meeting between Putin and Zelenskiy, to be followed by a trilateral summit among the three presidents. However, questions remain on security guarantees and whether a ceasefire or peace agreement is the best way forward.

Germany's 10-year bond yield DE10YT=RR, the euro zone benchmark, was down about 2 basis points (bp) at 2.755%. It hit a 4-1/2 month high of 2.787% on Monday. Yields move inversely with prices.

Germany's two-year yield DE2YT=RR, which is sensitive to changes in interest rate expectations, was steady at 1.962%.

"The easy explanation for the inactivity in the market today is that we don't know about progress in the Ukraine talks," said René Albrecht, analyst at DZ Bank.

"The next issue is monetary policy in the U.S. and the discussion about whether the Fed is going to cut in September or not."

Federal Reserve Chair Jerome Powell is due to speak at the Kansas City Fed's annual symposium in Jackson Hole, as money market traders stick with their bets for a rate cut next month.

Futures imply around an 85% chance of a quarter-point rate cut at September 16-17 meeting, little changed from the day before. The Fed's policy rate has been in the 4.25%-4.50% range since December.

The size and importance of the U.S. economy means changes in Fed rate expectations often influence European and other bond markets.

Expectations for European Central Bank interest rates remain well-anchored in the near term, with markets expecting the central bank to remain on hold in September.

Italy's 10-year bond yield IT10YT=RR was down 1 bp at 3.584%, keeping the spread between Italian and German 10-year yields unchanged at 82 bps.

The gap between Italian and French 10-year yields FR10IT10=RR continues to narrow, last at almost 14 bps.

"(Italian Prime Minister Giorgia) Meloni has brought calm back to Italian politics and the path of the budget is in line with EU norms," DZ Bank's Albrecht said.

"France is totally different. You have a risk in Paris that the National Assembly fires the prime minister and then you have the political instability issue again."

France's Prime Minister Francois Bayrou unveiled his 2026 budget plan in July that included almost 44 billion euros ($51.39 billion) of cuts.

The budget is likely to draw resistance from opposition Socialist lawmakers when parliament returns from recess next month, putting Bayrou's government at risk of being toppled.

($1 = 0.8562 euros)