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Euro area bond yields down less than 2 bp over two

sessions

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PIMCO says ECB easing cycle probably over

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Traders price in 54% chance of another ECB rate cut in

2026

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France still in focus as fiscal concerns remain

By Stefano Rebaudo

Oct 28 (Reuters) - Euro zone government bond yields

inched lower for a second straight session on Tuesday, paring

Friday's rise, as investors turned cautious ahead of central

bank decisions and amid uncertainty over a broad U.S.-China

trade deal.

The U.S. Federal Reserve wraps up its two-day policy meeting

on Wednesday, and rate decisions from the European Central Bank

and the Bank of Japan are due on Thursday.

Borrowing costs jumped on Friday after strong euro zone

purchasing managers' index readings, while traders priced in

slightly less than a 50% chance of another ECB rate cut next

year.

Investors are now awaiting key euro area inflation data,

which could influence expectations for future ECB policy moves.

Germany's 10-year Bund yields fell 0.5 basis points (bps) to

2.61%, after dropping one basis point (bp) the previous day.

Markets have fully priced a 25 bps rate cut by the Fed on

Wednesday for a while and will closely watch any clues about a

possible end of quantitative tightening measures.

The BoJ is expected to consider the best timing for the next

hike, while the ECB is seen keeping rates unchanged and offering

no guidance on the outlook.

"The ECB cutting cycle is presumably complete, with

inflation broadly at target and growth around trend, and the

deposit facility rate at a level likely considered the mid-point

of a neutral euro area policy range by the majority of Governing

Council members," said PIMCO portfolio manager Konstantin Veit.

Money markets priced in a 54% chance of a 25 bp ECB rate cut

by September. The key rate is seen at about

1.90% in December 2026 from the current

2%.

Euro zone consumers have lowered their inflation

expectations for the next year, indicating price growth is no

longer a major worry, the ECB's Consumer Expectations Survey

showed.

Germany's 2-year yields, more sensitive to

expectations for ECB policy rate outlook, dropped one bp to

1.97%.

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 80.50. The

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

driven by investor concerns over France's fiscal trajectory.

"We remain negative on France," said Mohit Kumar a European

economist at Jefferies, referencing the French National

Assembly's adoption of an amendment to increase corporate taxes,

as a compromise to get a budget deal.

"The only way for the current government to survive is to

offer more compromises which would be fiscally negative," he

added.