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German 10-year yield rises after big fall last week

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ECB expected to cut rates again on Thursday

(Updates for European afternoon trading)

By Samuel Indyk

LONDON, June 2 (Reuters) -

Euro zone government bond yields were steady on Monday as

traders braced for a widely expected European Central Bank rate

cut later this week, while U.S. trade policy remained in focus.

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

euro zone, was last up less than 1 basis point (bp) at 2.513%,

after its biggest weekly fall since mid-April last week. Bond

yields move inversely to prices.

The European Central Bank is tipped to cut its key rate to

2% on Thursday, its eighth move this cycle. Investors reckon a

pause will then follow as the economy is holding up better than

anticipated and longer-term inflation worries creep back.

Money market traders are almost fully pricing in a

quarter-point move on Thursday, while about 55 basis points of

easing is priced by the end of the year, implying only one more

quarter point move.

"They (the ECB) have had all the opportunities in the world

to push back against market pricing and haven't done that," said

Nordea chief analyst Anders Svendsen.

"The interesting thing will be around the new staff

projections because they will factor in the fiscal package from

Germany and the trade war," he added. "It will probably push up

their core inflation forecast a little bit."

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

to changes in interest rate policy and expectations, was little

changed at 1.79%, within its recent tight range.

Markets were largely unmoved after data showed U.S. and euro

zone manufacturing activity contracted last month, even as the

downturn in euro zone manufacturing eased slightly.

The HCOB Eurozone Manufacturing Purchasing Managers' Index

rose to 49.4 in May from 49.0 in April. That was a 33-month high

and in line with a preliminary estimate, but below the 50.0

threshold separating growth from contraction.

Attention remains on U.S. trade policy, after President

Donald Trump on Friday said he planned to increase tariffs on

imported steel and aluminium to 50% from 25%, deepening his

trade war.

"Doubling import taxes on steel and aluminium, and

aggravating China once again, mean we face a situation where

uncertainty prevails," said AJ Bell investment director Russ

Mould.

Traders were also cautious around a 10-year Japanese auction

taking place on Tuesday, which comes following weak demand for

long-dated auctions in May.

Yields of government bonds across the globe with the longest

maturities have risen in recent weeks, although moves in Germany

have been more subdued despite Germany's spending commitments.

Germany's 30-year yield was last up 1.5 bps at

3.02%, but remains well below its year-to-date high of 3.25%

from mid-March.

Italy's 10-year yield, the benchmark for the

euro zone periphery, was up 0.5 bps to 3.50%, keeping the

closely watched gap between Italian and German 10-year bond

yields steady at 96 bps.