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Euro zone yields track Treasury yields higher

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Federal Reserve expected to leave US rates unchanged

(Updates after afternoon European trading)

By Amanda Cooper and Alun John

LONDON, July 30 (Reuters) - Euro zone government bond

yields inched higher on Wednesday, tracking a rise in U.S.

Treasury yields after data showed the U.S. economy rebounded in

the second quarter and the Treasury announced its quarterly

refunding plans.

All eyes were on the U.S. Federal Reserve, which is expected

to keep interest rates on hold later in the day, while investors

continued to take stock of the European Union's trade deal with

the United States and a hefty fall in the euro this week.

German 10-year yields, which serve as the

benchmark for the wider euro zone, were last up just over 1

basis point at 2.70%.

Analysts at Deutsche Bank said in a note that late July and

August is traditionally a strong period for government bonds,

partly due to a seasonal lull in corporate issuance which

results in excess cash being temporarily parked in sovereign

debt.

This would then be reallocated in the September

"back-to-school" issuance wave, they added.

However, with the EU's trade deal with the U.S. removing the

risk of a full-blown trade war, they see Germany's 10-year yield

eventually rising above 3%.

The Fed will announce its rate decision after the European

market close. Investors will be carefully watching U.S.

President Donald Trump's reaction as he has been piling pressure

on the central bank to cut rates.

Euro zone economic growth data showed the single currency

bloc proved more resilient than expected in the second quarter,

expanding by 0.1%, against forecasts for no growth, which

suggested businesses are adapting to the uncertainty around

trade.

"Despite uncertainty prevailing in the first half of the

year, combined (euro zone) growth in the first two quarters has

not disappointed," said Bert Colijn, ING chief economist,

Netherlands.

"For the short term, don't expect miracles, but at the same

time, there are new signs of life starting to emerge for the

euro zone economy."

This growth picture, combined with inflation hovering around

the European Central Bank's 2% target, means traders have been

whittling away their bets on another European Central Bank rate

cut this year.

Germany's rate sensitive two-year yields were up

2 bps at 1.93%.

Other government bonds largely moved in line with the German

benchmark, helping keep spreads tight.

Italy's 10-year yield was up just over 2 bps at 3.55%,

leaving the gap over the German equivalent at just 82 bps.

The gap between French and German 10-year yields was last at 65

basis points, having closed just above 63 bps on Tuesday, the

tightest since the volatility around France's election last

year.