Euro zone government bond yields edge down before ECB policy meeting

By Stefano Rebaudo

Jan 30 (Reuters) - Euro zone government bond yields edged lower on Thursday, ahead of a European Central Bank policy meeting which is widely expected to cut rates by 25 basis points and keep the door open to further policy easing.

While ECB President Christine Lagarde is unlikely to commit explicitly to more cuts, she is likely to argue that the direction of policy remains clear and that the risk of a trade war with the United States could further sap weak growth.

Germany's 10-year bond yield, the euro area's benchmark, fell 1.5 basis points (bps) to 2.56%.

U.S. 10-year Treasury yields dropped 3.5 bps to 4.52%, in early London trading. They reversed an earlier rise on Wednesday after Federal Reserve Chair Jerome Powell said he expects to see further progress on inflation.

Money markets priced in a 94% chance of a 25 bps ECB rate cut on Thursday and a deposit facility rate at 2.1% at the end of 2025 from the current 3%.

Germany's two-year bond yield, more sensitive to ECB rate expectations, was down 2 bps at 2.25%.

Italy's 10-year yield was 0.5 bps lower at 3.65%. The gap between Italian and German yields -- a market gauge of the risk premium investors demand to hold Italian debt -- stood at 105.5 bps.

The yield spread between OATs and Bunds fell 0.5 bps to 74 bps as French budget talks teetered on the brink of collapse on Wednesday.

The spread widened to around 90 bps, its highest since 2012, in mid-January and end-November amid fears that France would be unable to cut its growing budget deficit.

(Reporting by Stefano Rebaudo, Editing by Bernadette Baum)