Euro area bond yields on track for two straight weekly rise?after Fed, ECB

(Adds comments, background)

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Bund yields remain on track for a monthly decline

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Trade tensions earlier this month supported bond prices

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PIMCO expects prolonged period of ECB inaction

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Traders price in about 45% chance of ECB rate cut in 2026

By Stefano Rebaudo

Oct 31 (Reuters) - Euro zone government bond yields were on track for a second straight weekly rise following a hawkish signal from 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 area shows continued resilience in the face of uncertainty.

Euro zone 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 one basis point (bp) at 2.65%. They were set for a weekly increase of 2 bps, after climbing 4.5 bps the week before.

"We tend to agree with the governing council majority view that the risk to the medium-term inflation outlook remains broadly balanced," Konstantin Veit, portfolio manager at PIMCO, said.

"The ECB's reaction function is not geared towards fine-tuning policy, and we continue to expect a prolonged period of inaction on policy rates," he added.

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 its president, Christine Lagarde.

Money markets were pricing in a 45% chance of a 25-basis-point ECB rate cut by September, 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%.

Bund yields were also about to record a monthly decline of 6.5 bps, as mounting concerns over the economic fallout from U.S.-China trade tensions revived bets on another ECB rate cut and dragged borrowing costs lower earlier in the month.

U.S. President Donald Trump said on Thursday he had agreed with President Xi Jinping to trim tariffs on China in exchange for Beijing cracking down on the illicit fentanyl trade, resuming U.S. soybean purchases and keeping rare earths exports flowing.

"On U.S. China, a broad agreement is a short term positive," Mohit Kumar, an economist at Jefferies, said.

"But our view remains that medium term, both the US and China would seek to reduce dependence on one another," he added.

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

Euro zone inflation slowed a touch in October and continued to hover near the ECB's 2% target.

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 77.50 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 and Andrew Heavens)