Euro area bond yields slip as traders see stronger odds of big Fed cut

By Sruthi Shankar

Sept 13 (Reuters) - Euro zone yields fell on Friday, mirroring a decline in U.S. Treasury yields after media reports fuelled speculation about a big interest rate cut by the Federal Reserve next week.

The Wall Street Journal and the Financial Times reported it might be a close call next Wednesday on whether the U.S. central bank cuts by a large 50 basis points (bps) or 25 bps, surprising markets that have seen a quarter-point move as more likely.

The European Central Bank cut rates as expected on Thursday and tweaked its economic forecasts, but gave little away in terms of the time or size of subsequent moves. Another cut by December is fully priced into markets but the chance of an interim move in October is seen only at 30%.

The German 10-year bond yield, the benchmark for the euro zone bloc, slipped 0.5 basis points (bps) to 2.15% and looked on track to end the week slightly lower.

The two-year bond yield, which is more sensitive to ECB rate expectations, fell 2 bps to 2.21%.

"We see scope for a further correction in Bunds in the coming weeks if data support a scenario of gradual ECB easing," Unicredit analysts noted.

Ratings agencies Moody's and S&P Global are expected to review their sovereign credit rating for Spain later on Friday.

The spread between German and Spanish bond yields widened marginally to 79.1 bps from 77.8 bps in the prior session.

Italy's 10-year yield fell 3.5 bps? to 3.52%, and the gap between Italian and German bond yields tightened 2 bps to 136 bps.

A slew of central banks including the Fed, the Bank of Japan and the Bank of England are set to announce rate decisions next week, renewing the broad picture of global monetary policy.

The rate-sensitive U.S. 2-year Treasury yield slipped 5 bps to 3.60%, as traders bought bonds in anticipation of an aggressive cut by the Fed.

Bond prices move inversely to yields.

"A WSJ article seemed to open the door again for 50 bps, making 25 bps not quite a done deal yet," Citi strategist Dirk Willer said. "Perhaps a 50bp cut is still on the table because when comparing the economic data relative to past easing cycles, we are already in a weaker spot."

Citi strategists however expect the U.S. central bank to cut rates by 25 bps next week, and sees cuts of 50 bps each in November and December.

Traders are pricing in a 43% chance of a large 50 bps cut by the Fed next week, as per CMEGroup's Fedwatch tool, up from 28% a day ago. (Reporting by Sruthi Shankar in Bengaluru; Editing by Amanda Cooper, Hugh Lawson, William Maclean)