(Adds comments, background)

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Bund yields remain on track for a monthly decline

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Trade tensions earlier this month supported bond prices

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PIMCO expects prolonged period of ECB inaction

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Traders price in about 45% chance of ECB rate cut in 2026

By Stefano Rebaudo

Oct 31 (Reuters) - Euro zone government bond yields were

on track for a second straight weekly rise following a hawkish

signal from the Federal Reserve and an uneventful European

Central Bank meeting.

The ECB kept interest rates unchanged at 2% and reiterated

that policy was in a "good place" as economic risks recede and

the euro area shows continued resilience in the face of

uncertainty.

Euro zone borrowing costs rose last Friday after traders

digested stronger-than-expected purchasing managers' index

readings.

Germany's 10-year Bund yields, the euro area's

benchmark, were up one basis point (bp) at 2.65%. They were set

for a weekly increase of 2 bps, after climbing 4.5 bps the week

before.

"We tend to agree with the governing council majority view

that the risk to the medium-term inflation outlook remains

broadly balanced," Konstantin Veit, portfolio manager at PIMCO,

said.

"The ECB's reaction function is not geared towards

fine-tuning policy, and we continue to expect a prolonged period

of inaction on policy rates," he added.

Traders trimmed bets on future ECB rate cuts early Thursday

after the Fed meeting, with market positioning holding steady

following the ECB's policy statement and comments from its

president, Christine Lagarde.

Money markets were pricing in a 45% chance of a

25-basis-point ECB rate cut by September,

from around 70% last Friday before PMI data was released. The

key rate is seen at 1.90% in December 2026

from the current 2%.

Bund yields were also about to record a monthly decline of

6.5 bps, as mounting concerns over the economic fallout from

U.S.-China trade tensions revived bets on another ECB rate cut

and dragged borrowing costs lower earlier in the month.

U.S. President Donald Trump said on Thursday he had agreed

with President Xi Jinping to trim tariffs on China in exchange

for Beijing cracking down on the illicit fentanyl trade,

resuming U.S. soybean purchases and keeping rare earths exports

flowing.

"On U.S. China, a broad agreement is a short term positive,"

Mohit Kumar, an economist at Jefferies, said.

"But our view remains that medium term, both the US and

China would seek to reduce dependence on one another," he added.

Germany's 2-year yields, which are more sensitive

to expectations for the ECB policy rate outlook, were roughly

unchanged at 1.99%.

Euro zone inflation slowed a touch in October and continued

to hover near the ECB's 2% target.

The yield gap between safe-haven Bunds and 10-year French

government bonds - a market gauge of the risk

premium investors demand to hold French debt - was at 77.50 bps.

The spread hit 87.96 bps in early October, its widest since

January, driven by investor concerns over France's fiscal

trajectory.

(Writing by Stefano Rebaudo; Editing by Thomas Derpinghaus and

Andrew Heavens)