Euro zone government bond yields edge up before ECB, US inflation data

By Stefano Rebaudo

Sept 11 (Reuters) - Euro zone government bond yields edged higher on Thursday as investors stayed cautious ahead of the European Central Bank's policy decision and key U.S. economic data due later in the session.

Investors expect the ECB to hold rates steady and President Christine Lagarde to offer limited guidance, as uncertainty over the economic impact of U.S. tariffs clouds the outlook.

U.S. inflation data may reshape market expectations for the Federal Reserve's policy trajectory, especially after last week's disappointing jobs data.

Germany's 10-year bond yield, the benchmark for the euro zone bloc, rose 0.5 basis points (bps) to 2.66%. It hit 2.80% last week, its highest level since March 26.

Some analysts also argued that the ECB will keep alive the prospect of further easing.

Markets priced in a 65% chance of a 25 bps ECB cut by June 2026 to 1.75% but also a deposit facility rate at 1.9% by the end of 2026.

Analysts flagged that the Fed's easing cycle and its implications for the exchange rate could trigger further ECB rate cuts. Meanwhile, the political situation in France could deteriorate, suggesting the ECB may avoid adding fuel to the fire with an overly hawkish stance.

Germany's 2-year yields, more sensitive to expectations for ECB policy rates, rose 1.5 bps to 1.97%.

"The ECB is highly likely to hold and offer little steer over the policy outlook, repeating the 'deliberately uninformative' approach from July," said Citi.

"The staff projections are likely to reinforce that the default position is to hold unless forced into action."

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 79 bps, after protests swept across France over planned spending cuts.

"We suspect Lagarde will face more questions on the situation in France than ECB policy, and whether contingencies are now in place to manage sovereign spreads to prevent sudden adverse tightening in financial conditions," said Geoff Yu, EMEA macro strategist at BNY Mellon.

The benchmark 10-year U.S. Treasury yield rose 1.5 bps to 4.05% in London trade, after falling on Wednesday. (Reporting by Stefano Rebaudo; Editing by Susan Fenton)