Dec 11 (Reuters) - Euro zone government bond yields were

mixed on Wednesday as investors awaited Thursday's European

Central Bank policy meeting, which should deliver a 25 basis

points rate cut and some dovish guidance.

U.S. data showing November inflation aligned with analyst

expectations failed to provide a clear direction.

We expect "the ECB to more explicitly recognise that, so

long as incoming data confirms the rapid convergence of

inflation to target, it will ease policy all the way to a

neutral setting," said Citi, after reiterating its expectations

for a 25 bps rate cut.

It added as the ECB wants to avoid being too dovish, it is

unlikely to accelerate its monetary easing.

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

the euro zone bloc, rose one bp to 2.13%.

Some analysts flagged that the ECB could remove the

reference to the need to keep policy rates "sufficiently

restrictive" in its statement, while President Christine Lagarde

might say in the press conference that inflation is broadly on

track to fall to the target.

Markets fully priced in an ECB 25 bps rate cut

on Thursday, no chance of a 50 bps move,

and a depo rate at 1.82% in July 2025.

The ECB deposit facility rate is currently at 3.25%.

German borrowing costs spiked to a four-month high on

October 31 as investors worried about long-term inflation

pressures in the euro area and the upcoming U.S. election.

They have since fallen back as euro zone economic data has

painted a weaker picture than expected.

Germany's two-year government bond yield, more

sensitive to European Central Bank rate expectations, was down

0.5 bps at 1.96%.

Italian bonds outperformed their peers, with the 10-year

yields hitting a fresh 28-month low at 3.162% and the spread

between Italian and German borrowing costs -- a market gauge of

the risk premium investors demand to hold Italian debt -

narrowing to 106 bps. Bond prices move inversely with yields.

The yield gap hit 104.5 bps last week, its lowest since

October 2021, after the FT reported that EU countries are

discussing a 500 billion euro joint fund for common defence

projects and arms procurement, tapping bond markets.

Projects funded by joint European Union issuances can

stimulate economic growth without increasing the debt burden of

highly leveraged economies.

This is why expectations for such joint-funded plans often

lead to a narrowing of the gaps between the bond yields of the

most indebted countries and those of Germany, seen as the

benchmark for stability in the euro zone.

The yield spread between French government bonds and

safe-haven Bunds showed little reaction after

President Emmanuel Macron set himself 48 hours to name a new

government on Tuesday. It was last down 0.5 bps at 76.20 bps.