By Samuel Indyk
LONDON (Reuters) -Euro zone government bond yields were falling slightly on Tuesday with investors still on edge after recent U.S. credit wobbles and a flare-up in U.S.-China trade tensions, while attention turned to speeches by the bloc’s rate-setters.
European Central Bank chief Christine Lagarde is scheduled to speak later in the day, one of the last opportunities to shape policy before a blackout period begins on Thursday ahead of next week’s policy meeting.
Germany’s 10-year bond yield was down 1 basis point (bp) at 2.573%, having dropped to its lowest since June at 2.523% on Friday.
The yield on the euro zone benchmark fell for a fourth straight week last week as investors sought safe-haven assets due to concerns about the U.S. government shutdown, the trade spat with China and signs of U.S. credit stress. Bond yields move inversely to prices.
ECB IN ‘GOOD PLACE’
Markets were awaiting ECB President Lagarde’s speech at 1100 GMT for clues about the path for monetary policy, after the central bank refrained from cutting rates at both its July and September meetings.
With inflation close to target and growth remaining somewhat resilient, Lagarde has repeatedly said the ECB is in a “good place”, suggesting no need to take policy action in coming meetings.
Futures markets imply that the central bank will keep its policy rates on hold for the remainder of the year, and that there is an 80% chance of another quarter-point rate cut through 2026.
“We need to see how the fiscal expansion in Germany is going to affect prices and economic activity,” said Rene Albrecht, analyst at DZ Bank.
“We will probably see a positive impact on growth and price pressures in the second half of 2026, so there might be a chance for a cut in the first quarter of next year.”
Germany’s two-year yield, which is sensitive to changes in interest rate expectations, was little changed at 1.924%.
WORRIES LINGER
While markets have calmed since the tail end of last week, investors remained on edge over fears U.S. credit scares and writedowns could spill over into other markets.
The latest worries on Thursday, when Zions Bancorp disclosed losses tied to commercial and industrial loans, drove a flight to safe-haven German bonds, pushing yields lower.
Concerns about fiscal sustainability in countries such as the U.S., Japan and France also lingered.
The French sovereign was unexpectedly downgraded by S&P to ‘A+/A-1’ from ‘AA-/A-1+’ on Friday, a warning that political instability puts the government’s efforts to repair its finances at risk.
France’s 10-year yield was down about 1 bp at 3.358%, keeping the spread over the 10-year German yield steady at about 79 bps.
(Reporting by Samuel Indyk; Editing by Kirsten Donovan; editing by Mark Heinrich)
