Bund yields flat after hitting one-month high on US shutdown optimism

(Recasts first paragraph)

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Commerzbank forecasts US Treasury yields towards upper end of recent range

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Risk sentiment remains upbeat across markets

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German 2-year yields hover just below October 30 levels

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Rates appropriate but ECB should remain cautious, says de Guindos

By Stefano Rebaudo

Nov 10 (Reuters) - Euro area benchmark Bund yields were roughly unchanged on Monday, as expectations for a quick end to the U.S. government shutdown drove investors into risky assets while reducing expectations for an adverse impact on the U.S. economy.

The U.S. Senate advanced a measure to reopen the federal government and end a 40-day shutdown that has weighed on business activity, reinforcing expectations for Federal Reserve rate cuts, which could affect the euro area.

Meanwhile, overall risk sentiment remained upbeat on Monday, turning investors away from safe-haven government bonds.

FEARS OF ECONOMIC DAMAGE SUBSIDING

Germany's 10-year yields, the euro area's benchmark, were up 0.5 basis points at 2.67%, after hitting 2.699%, the highest level since October 9 early in the session.

Benchmark 10-year U.S. Treasury yields were up 4 bps at 4.13%, while 2-year yields rose 4 bps to 3.60%.

"Against this backdrop, bond markets are feeling the pressure with risk sentiment improving and fears about the damage to the economy subsiding," said Rainer Guntermann, rates strategist at Commerzbank, referring to hopes for the end of the U.S. shutdown.

"10-year U.S. Treasury yields thus look set to move to the upper end of their range with a slight curve steepening bias," he added.

OUTLOOK FOR RATES

White House economic adviser Kevin Hassett said in an interview on Sunday that the nation's fourth-quarter GDP could be negative if the shutdown dragged on.

Money markets priced in about a 40% chance of a 25-basis-point European Central Bank rate cut by September 2026 , from more than 80% in the middle of last month, at the height of U.S.-China trade tensions. The key rate is seen at 1.90% in December 2026 and 1.95% by March 2027 from the current 2%.

Policy rates were at the appropriate level barring changes in the economic situation, the ECB's Vice President Luis de Guindos said in an interview published on Monday.

He said the ECB should remain "very prudent and cautious", even if uncertainty has eased over the past six months following a trade deal between the European Union and the U.S.

Lack of U.S. economic data, due to the shutdown, and a well-established ECB rate outlook have kept volatility subdued in the last few weeks.

Germany's 2-year yields, more sensitive to expectations for ECB policy rate outlook, were up one bp to 2.0%.

Euro area 2-year borrowing costs hovered just below levels seen after the ECB's uneventful October 30 policy meeting, as markets have priced in a "higher-for-longer" rate path since the summer.

Italy's 10-year government bond yield dropped one bps to 3.42% after hitting 3.451%, the highest since October 13. The gap over safe-haven German Bunds - a key gauge of the extra return investors demand to hold Italian debt instead of German bonds - was at 72.50 bps after widening to 77.40 bps earlier in the session, the highest since October 30. The spread had fallen to 71.65 bps last week, the tightest level since 2010. (Reporting by Stefano Rebaudo; editing by Alex Richardson)