Euro zone bond yields resume last week's downward shift

By Samuel Indyk

LONDON (Reuters) -Euro zone government bond yields dropped on Tuesday, moving in line with U.S. Treasuries and resuming last week's trend begun by market jitters about U.S. credit and bets on further Federal Reserve easing. 

Germany's 10-year bond yield was down 3 basis points (bp) at 2.55%, closing in on Friday's four-month low of 2.52%. 

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. 

The 10-year U.S. Treasury yield was also down around 3 bps at 3.96%, likewise closing in on Friday's 3.93%. 

"Looking for lower market rates is the simplest interpretation of the wider backdrop," said analysts at ING in a note. 

They added that European rates seemed more sensitive to global factors than local political risks at present. 

ECB IN 'GOOD PLACE'

Bond investors around the world are waiting for delayed U.S. inflation data due on Friday, the only major piece of U.S. economic data to be released during the long-running U.S. government shutdown. 

The Federal Reserve then meets next week and markets currently see it as all-but-certain to cut rates by 25 basis points, and then do so again in December. 

Meanwhile in the euro zone, inflation is close to target and growth somewhat resilient. ECB President Christine Lagarde has repeatedly said the bank 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." 

Germany's two-year yield, which is sensitive to changes in interest rate expectations, was little changed at 1.91%.

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 2 bps at 3.34%, keeping the spread over the 10-year German yield steady at about 79 bps. 

(Reporting by Samuel Indyk; additional reporting by Alun John Editing by Kirsten Donovan; editing by Mark Heinrich)