Euro zone yields little changed, ECB pricing steady

*

Investors watching trade developments

*

ECB rate pricing 'stuck' after US-China truce

*

Traders price in about 50% chance of another rate cut in 2026

*

French budget in focus after lawmakers reject tax on ultra-rich

(Updates for European afternoon trading)

By Stefano Rebaudo

Nov 3 (Reuters) - Euro zone government bond yields were climbing slightly on Monday, extending a recent rise after last week's key interest rate decisions and as investors tracked trade developments in the wake of U.S.-China trade talks.

Euro area borrowing costs recorded their second straight weekly rise last week when the Federal Reserve hinted it could pause rate cuts in December given a lack of economic data and following an uneventful European Central Bank policy meeting.

The ECB kept its three main interest rates on hold, while President Christine Lagarde repeated that policy was in a "good place" as economic risks were receding.

Germany's 10-year yield, the euro area's benchmark, was up almost 2 basis points at 2.656% after touching 2.662% earlier in the day, its highest since October 10.

The two-year yield, which is more sensitive to changes in interest rate policy, was up 1.5 bps to 2%.

STRONGER-THAN-EXPECTED DATA, EASING US-CHINA TRADE TENSIONS

"ECB pricing looks stuck once again, cemented by the U.S.-China trade truce," Citi said in its morning note.

"While the October (ECB) meeting offered little hope of any action anytime soon, there is still a possibility that the December consumer price index (HICP) projections could allow worries of a long-lasting undershoot to resurface, reigniting some debate about cutting to better protect the inflation target."

Traders had increased their bets on rate cuts last month due to mounting concerns over the economic fallout from differences on trade between the United States and China.

But stronger-than-expected data last month supported a hawkish repricing of ECB rate cut expectations, while trade tensions eased.

"Any lingering hope for the ECB's doves to make their case for a December cut have been dashed by the preliminary October PMI prints," said Bob Savage, head of markets macro strategy at BNY.

Money markets priced in a roughly 50% chance of a 25-basis-point ECB rate cut by September next year , down from over 80% in mid-October.

The ECB should not try to fine-tune its policy because adjusting for minor deviations could itself cause market volatility, ECB policymaker Peter Kazimir said on Monday.

ECB rate-setter Martin Kocher said the best policy for the central bank ahead of its December meeting is to wait and see how economic data evolves.

RARE US DATA AS FEDERAL SHUTDOWN CONTINUES

U.S. manufacturing contracted for an eighth straight month in October, the Institute for Supply Management said on Monday, as new orders remained subdued and suppliers were taking longer to deliver materials.

It was a rare piece of economic data as a month-long government shutdown has caused an official data blackout that was making it hard to get a good read of the economy.

"This survey suggests that the manufacturing sector remained anemic last month, with many industries continuing to cite tariffs as a major brake on activity," said Oliver Allen, senior U.S. economist at Pantheon Macroeconomics.

Tariffs will remain in focus this week as the U.S. Supreme Court will hear arguments on November 5 over whether U.S. President Donald Trump overstepped his authority in imposing most of his tariffs under a 1977 law known as the International Emergency Economic Powers Act.

FISCAL WORRIES IN FRANCE

French lawmakers on Friday shot down proposals to levy a wealth tax on the ultra-rich, demanded by the Left, during the debate over Prime Minister Sebastien Lecornu's belt-tightening budget, adding to concerns about the growing fiscal deficit.

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 little changed at 77.5 bps.

The spread hit 87.96 bps in early October, the widest since January, driven by investor concerns over France's fiscal trajectory.

(Reporting by Stefano Rebaudo, additional reporting by Samuel Indyk; Editing by Timothy Heritage and Joe Bavier)