Euro zone bond yields tread water before Fed, BoJ meetings

(Updates for European close)

By Stefano Rebaudo

July 29 (Reuters) - Euro zone government bond yields were steady on Tuesday as investors shifted focus to upcoming policy meetings of the Federal Reserve and the Bank of Japan, after the European Union and U.S. announced a trade agreement on Sunday.

Sovereign bonds had shown a muted reaction on Monday to Sunday's trade deal, under which the United States will impose a 15% import tariff on most EU goods.

Germany's 10-year government bond yield, the euro area's benchmark, was little changed at 2.688%.

The European Central Bank held its deposit rate steady at its session last week, a pause in rate cuts after 200 basis points (bps) of easing since the middle of last year.

Money market traders are pricing in a 65% chance of an ECB rate cut by December, and an 80% probability they cut the deposit rate by March 2026.

They had fully priced in a quarter-point rate cut by December early last week, before the ECB meeting and before a U.S.-Japan trade deal helped ease recession fears tied to a possible trade war.

Deutsche Bank scrapped its forecast for further rate cuts by the ECB and said they expect the central bank's next move to be a hike at the end of 2026.

"With the EU and U.S. having reached a trade deal, there is less reason for the ECB to cut policy rates further, especially with the economy proving more resilient this year and monetary transmission working effectively," Deutsche Bank strategists said in a note.

Germany's 2-year government bond yield - more sensitive to expectations for ECB policy rates - rose 1 bp to 1.911%.

The Fed is expected to keep its policy unchanged following the conclusion of its two-day Federal Open Market Committee meeting on Wednesday, despite pressure from U.S. President Donald Trump to cut rates.

"The fact that two out of seven members of the Fed board, Waller and Bowman, appear to be on the verge of voting against the majority and in favour of a cut, means that the signals from Fed Chair Powell for interest rates going forward will have less weight," said Elisabet Kopelman, U.S. economist at SEB.

The Bank of Japan is set to hold off raising interest rates on Thursday but may signal rate hikes later this year, after Tokyo's trade agreement with the U.S. reached last week.

Italy's 10-year government bond yield was down 1.5 bps at 3.52%, with the spread between BTP and Bund yields - a market gauge of the risk premium investors demand to hold Italian debt - at 82.7 bps. It hit 82.3 bps last week, its tightest level since April 2010. (Reporting by Stefano Rebaudo, additional reporting by Samuel Indyk; editing by Alexandra Hudson and Mark Heinrich)