(Recasts lead, adds comments, background)

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Bund yields hold at levels last seen at start of US

shutdown

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This week's US data in focus, to take time to assess

trajectory

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Markets pricing a 40% probability of a Fed rate cut in

December

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Euro-area spread tightening may be over, says FTI

strategist

By Stefano Rebaudo

Nov 17 (Reuters) - Euro area benchmark Bund yields

dropped on Monday, partially reversing gains from the previous

session, as markets acknowledged it would take time to

accurately gauge the economy as U.S. agencies clear a backlog of

data.

Market participants expect September's U.S. payroll data to

be released later this week.

Germany's 10-year yield fell 1.5 basis points

(bps) to 2.70%, after rising 3 bps on Friday, when it touched

its joint-highest since October 7 at 2.718%.

The euro zone economy will grow faster than earlier expected

in 2025, the European Commission forecast on Monday, mainly

thanks to a surge in exports in the first half of the year ahead

of expected tariff increases.

However, Bund yields kept hovering around the levels they

were when the U.S. shutdown began. Bund yield closed at 2.7134%

on October 1.

KEY RELEASES FOR FED POLICY MAY COME IN DECEMBER

Analysts expect more U.S. economic figures to start coming

in this week, with some volatility likely to pick up. However,

the key releases for shaping the Federal Reserve's policy path,

such as the consumer price index, are scheduled for December,

they say.

With European Central Bank policy on hold, the focus is

elsewhere, mainly on expectations for U.S. Federal Reserve

policy.

Money markets have in recent days priced the chance of a

25-bp rate cut next month at around 50%, according to CME Group

FedWatch tool. Chances on Monday were 44% from 60% a week ago.

A drumbeat of hawkish remarks from FOMC members-including

the presidents of the Dallas, Cleveland, and Boston Fed

banks-has made investors more cautious about a potential Fed

easing move in December.

In the euro area, markets priced in a 30% chance of a 25-bp

rate cut by July and a European Central

Bank deposit facility rate at 1.95% in December from the current

2%.

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

changes in ECB rate expectations, fell 0.5 bps to 2.03%.

Italy's 10-year government bond yield fell 2 bps

to 3.45%, while the gap over safe-haven German Bunds - a key

gauge of the extra return investors demand to hold Italian debt

instead of safe-haven German bonds - was at 73.50 bps, after

last week hitting a fresh 15-year low at 70.68 bps.

"The theme of the year has been European spreads versus

Germany's Bunds," said Michael Browne, global investment

strategist at Franklin Templeton Institute.

He noted that yield gaps hit fresh lows after media reports

questioned whether Chancellor Friedrich Merz's government will

follow through on its 500 billion euro fiscal boost, amid

uncertainties that have weighed on polling for Germany's

nine-month-old administration.

"Watch this space, but I think spread-betting may be over,"

Browne added.

German Finance Minister Lars Klingbeil is visiting China,

with Berlin under pressure as a record trade gap widens and

supply chains wobble.

Merz said on Monday that Germany could be facing the

greatest challenges since World War Two, citing its diplomatic

relationships with China and the United States.

The yield gap between 10-year French government bonds

and Bunds was at 74 bps after hitting 70.50 bps

last week, its lowest since August. The spread hit 87.96 bps in

early October, the widest since January, driven by investor

concerns over France's fiscal trajectory.