Euro zone government bond yields set for slight weekly rise after Fed, ECB

By Stefano Rebaudo Euro zone government bond yields were on track for a second straight weekly rise, following a hawkish signal by the Federal Reserve and an uneventful European Central Bank meeting.

The ECB kept interest rates unchanged at 2% and reiterated that policy was in a "good place" as economic risks recede and the euro zone shows continued resilience in the face of uncertainty.

Euro area borrowing costs rose last Friday after traders digested stronger-than-expected purchasing managers' index readings.

Germany's 10-year Bund yields, the euro area's benchmark, were up 1.5 basis points (bps) at 2.65%, set for a weekly rise of 2.5 bps.

Traders trimmed bets on future ECB rate cuts early Thursday after the Fed meeting, with market positioning holding steady following the ECB's policy statement and comments from President Christine Lagarde.

Money markets priced in a 45% chance of a 25-basis-point ECB rate cut by September, up from 40% on Thursday after the Fed meeting and from around 70% last Friday before PMI data was released. The key rate is seen at 1.90% in December 2026 from the current 2%.

Germany's 2-year yields, which are more sensitive to expectations for the ECB policy rate outlook, were roughly unchanged at 1.99%.

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 77 bps. The spread hit 87.96 bps in early October, its widest since January, driven by investor concerns over France's fiscal trajectory. (Writing by Stefano Rebaudo; Editing by Thomas Derpinghaus)