German yield curve flattens after 4 weeks of steepening

By Stefano Rebaudo

July 21 (Reuters) - The German yield curve flattened on Monday as investors took a breather after four consecutive weeks of pushing it steeper, ahead of euro zone PMI data and the European Central Bank's policy decision later this week.

Economists expect the ECB to leave rates unchanged on Thursday, before potentially cutting them in September.

Some analysts expect June PMIs to stagnate on Thursday, citing tariff uncertainties and a strong euro - factors that could lend support to Bund prices.

Asian shares and the yen held their ground on Monday as Japanese elections proved bad for the government but no worse than already priced in.

German 2-year government bond yields - more sensitive to expectations for European Central Bank policy rates - fell 2.5 basis points to 1.82%.

Germany's 10-year government bond yield, the euro area's benchmark, dropped 4.5 bps to 2.65%.

The German yield curve recorded its fourth straight week of steepening on Friday but the gap between 10- and 2-year yields narrowed 1.5 bps to 82.5 bps early on Monday.

Money markets are fully pricing in one 25 bp ECB rate cut by December, and around a 50% chance of that move coming in September.

Italy's 10-year government bond yields were down 5 bps at 3.53%, with the spread between BTP and Bund yields - a market gauge of the risk premium investors demand to hold Italian debt - at 86.5 bps. It hit 84.20 bps in June, its lowest since March 2015.

(Reporting by Stefano Rebaudo, editing by Kirsten Donovan)