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German bond yields fall slightly

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Markets await Lagarde speech

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Germany's fiscal expansion may soon impact growth,

inflation

(Updates for European morning trading)

By Samuel Indyk

LONDON, Oct 21 (Reuters) - Euro zone government bond

yields were falling slightly on Tuesday with investors still on

edge after recent U.S. credit wobbles and a flare-up in

U.S.-China trade tensions, while attention turned to speeches by

the bloc's rate-setters.

European Central Bank chief Christine Lagarde is scheduled

to speak later in the day, one of the last opportunities to

shape policy before a blackout period begins on Thursday ahead

of next week's policy meeting.

Germany's 10-year bond yield was down 1 basis

point (bp) at 2.573%, having dropped to its lowest since June at

2.523% on Friday.

The yield on the euro zone benchmark fell for a fourth

straight week last week as investors sought safe-haven assets

due to concerns about the U.S. government shutdown, the trade

spat with China and signs of U.S. credit stress. Bond yields

move inversely to prices.

ECB IN 'GOOD PLACE'

Markets were awaiting ECB President Lagarde's speech at 1100

GMT for clues about the path for monetary policy, after the

central bank refrained from cutting rates at both its July and

September meetings.

With inflation close to target and growth remaining somewhat

resilient, Lagarde has repeatedly said the ECB is in a "good

place", suggesting no need to take policy action in coming

meetings.

Futures markets imply that the central bank will keep its

policy rates on hold for the remainder of the year, and that

there is an 80% chance of another quarter-point rate cut through

2026.

"We need to see how the fiscal expansion in Germany is going

to affect prices and economic activity," said Rene Albrecht,

analyst at DZ Bank.

"We will probably see a positive impact on growth and price

pressures in the second half of 2026, so there might be a chance

for a cut in the first quarter of next year."

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

changes in interest rate expectations, was little changed at

1.924%.

WORRIES LINGER

While markets have calmed since the tail end of last week,

investors remained on edge over fears U.S. credit scares and

writedowns could spill over into other markets.

The latest worries on Thursday, when Zions Bancorp disclosed

losses tied to commercial and industrial loans, drove a flight

to safe-haven German bonds, pushing yields lower.

Concerns about fiscal sustainability in countries such as

the U.S., Japan and France also lingered.

The French sovereign was unexpectedly downgraded by S&P to

'A+/A-1' from 'AA-/A-1+' on Friday, a warning that political

instability puts the government's efforts to repair its finances

at risk.

France's 10-year yield was down about 1 bp at

3.358%, keeping the spread over the 10-year German yield

steady at about 79 bps.