(Updates for European morning trading)

By Samuel Indyk

LONDON, Aug 14 (Reuters) - Euro zone bond yields fell

slightly on Thursday, extending a drop from Wednesday as

investors priced in more easing from the U.S. Federal Reserve

after Treasury Secretary Scott Bessent urged the central bank to

opt for a large interest rate cut.

In an interview on Bloomberg TV, U.S. President Donald

Trump's influential right-hand man on the economy said there was

"a good chance" the Fed lowers interest rates by 50 basis points

(bps) when it convenes next month.

Investors acted to fully price in a rate cut from the Fed in

September, with around a 5% chance of a larger 50-bp move. Money

market futures imply about a 50% chance that the European

Central Bank lowers borrowing costs again by the year's end.

The size and importance of the U.S. economy means

expectations about Fed rate cuts often heavily influence other

markets.

"We haven't had a major catalyst from the euro area so, more

broadly, moves have been driven by the U.S.," said Mohamad

Al-Saraf, FX & fixed income research associate at Danske Bank.

"In general, moves this week have been driven by the

better-than-feared U.S. inflation report and it now looks pretty

much a done deal that the Fed will cut next month. The question

is whether they go for 25 or 50 basis points."

Tuesday's U.S.

inflation report

was a mixed bag, with headline consumer prices rising

marginally but underlying measures showing signs of building

price pressures.

Germany's two-year yield, which is sensitive to

changes in monetary policy expectations, was down 1 bp at

1.926%. It fell 3.5 bps on Wednesday, its biggest daily drop

since August 1.

Germany's 10-year yield, the benchmark for the

euro area, was down 2 bps at 2.66% after falling 6.5 bps on

Wednesday.

Italy's 10-year bond yield fell 2.5 bps to

3.46%, pushing the spread between Italian and German 10-year

yields to 78.2 bps, the tightest since at least

2011, according to LSEG data.

The yield gap between Italian and French 10-year yields

narrowed to about 14 bps, reflecting increasing

concerns about France's fiscal trajectory.

France unveiled a 2026 budget plan in July that included

almost 44 billion euros ($51.41 billion) of

cuts

, which will probably draw resistance from Socialist

lawmakers when parliament returns from recess next month.

Worries about France's debt sustainability have been

driving the narrower spread between French and Italian yields,

according to Danske Bank's Al-Saraf.

Investors were awaiting U.S. factory inflation and jobless

claims data due later on Thursday, as well as the Alaska summit

between Trump and Russian President Vladimir Putin on Friday.

Analysts have said a ceasefire in Ukraine could support

riskier assets and weigh on government bond prices, lifting

yields.

Germany's 30-year yield, which touched an

11-year high of 3.309% on Tuesday, was down 1 bp at 3.222%.