Euro zone bond yields inch lower, market unfazed by moves elsewhere

(Updates after morning trading)

By Alun John

LONDON, Nov 25 (Reuters) - Euro zone bond yields nudged lower on Tuesday as U.S. Treasury yields held their recent declines on the back of growing expectations the Federal Reserve will deliver a December rate cut.

Germany's 10-year Bund yield was down one basis point at 2.68%, broadly in the middle of its range for much of this year.

With markets seeing the European Central Bank as firmly on hold, European rates have been fairly muted in recent weeks. Spillovers from moves in stocks or U.S. and Japanese government bonds have not been sufficient to drive significant shifts either.

U.S. yields have been dropping in recent days as bets on a Federal Reserve rate cut rise, but were steadier on Tuesday with the 10-year Treasury yield at 4.03%.

The decline in U.S. yields helped the gap between German and U.S. 10 year yields to drop to 133.3 bps on Monday, its narrowest closing level in two months. It ticked slightly wider again on Tuesday.

Analysts at UBS said the fact investors cannot be too confident about the direction of central bank policy on either side of the Atlantic is adding a note of caution to markets.

"Divergence in central bank views and delayed data make high-conviction trades harder," they wrote in a note to clients.

They observed that while ECB President Christine Lagarde has repeatedly said its policy rate is "in a good place", she warned last week about the euro zone's growth vulnerabilities .

Meanwhile, in the U.S., though the last few Fed speakers have indicated they are open to a rate cut in December's meeting, others last week were less sure.

"You might see the least groupthink you've seen from the FOMC (rate setting committee) in a long time," Fed Governor Christopher Waller said last week.

The slow trickling in of U.S. economic data delayed by the government shutdown further adds to the uncertainty.

U.S. retail sales and PPI for September are due later Tuesday.

The back and forth around a possible peace deal to end the war in Ukraine has also had little effect on euro zone bonds even as it moves stocks, particularly defence names.

Analysts at ING said if a deal were to lead to lower gas prices, and so lower inflation, that could cause euro zone yields to fall.

Elsewhere in Europe on Tuesday French and Italian 10-year yields were largely moving in line with Germany's.

France's 10-year yield was down 2 bps at 3.42% and Italy's was down a similar amount at 3.43%. (Reporting by Alun John; Editing by Emelia Sithole-Matarise and Krishna Chandra Eluri)