Euro zone yields ease ahead of ECB, politics in focus
Updates at 1032 GMT
By Samuel Indyk
LONDON, July 16 (Reuters) -Euro zone government bond yields fellfor a second day on Tuesday as investors looked ahead to Thursday's European Central Bank policy announcement with data hinting at a further slowdown in Germany, Europe's largest economy.
Germany's 10-year bond yield DE10YT=RR, the euro area's benchmark, was last down 3.5 basis points (bps) at 2.437%. It fell 2.5 bps on Monday.
German investor morale worsened more than expected in July, the ZEW economic research institute said on Tuesday, underlining concerns about the economic recovery in Germany.
The decline in morale was attributed to a fall in exports, political uncertainty and a lack of clarity about the ECB's policy outlook, ZEW said.
The central bank announces policy on Thursday this week and is widely expected to hold interest rates steady, while the outlook for future rate cuts will depend on how the economy evolves.
"I think they will say they are data dependent, meaning that they can cut in September, but I don't think they will indicate that is the way they will lean unless data supports it," said Anders Svendsen, chief analyst at Nordea.
The futures market attaches less than a 10% chance of a move at Thursday's meeting and around an 85% chance of a quarter-point cut in September, LSEG data showed.
Germany's policy-sensitive two-year yield DE2YT=RR was last down 4 bps at 2.752%, its lowest level since June 21.
POLITICS KEEPS MARKETS GUESSING
Investors were also still assessing what the attempted assassination of U.S. presidential candidate Donald Trump might mean for financial markets.
Markets were betting that Trump's chances of winning might be greater and that his policies could reignite inflation in the U.S. and increase the deficit.
The benchmark U.S. 10-year yield US10YT=RR, which had risen on Monday, was down 5 basis points on Tuesday, reversing all of the prior day's gain. It was last at 4.183%.
"There doesn't seem to be a long-lasting impact (from the assassination attempt) for the market right now," said Sophia Oertmann, analyst at DZ Bank.
"Markets had already raised their chances of a Trump victory after the TV debate. The market was already going in that direction."
France also remains in focus for investors with French President Emmanuel Macron likely to accept the resignation of his current government to enable elected lawmakers to sit in parliament when it convenes on Thursday.
France's 10-year yield FR10YT=RR was last down 3 bps at 3.084%, its lowest level since June 7, the last trading day before Macron called the snap election on June 9.
The yield gap between French and German 10-year bonds DE10FR10=RR stood at 65 bps, around 15 bps wider than where it was before June 9.
That gap is a closely watched measure of risk and surged to 85 bps in late June, its widest since the peak of the euro zone crisis in 2012.
"I don't expect the spread to change much from this current level of 65 bps because the uncertainty will not go away any time soon," DZ Bank's Oertmann said.
"Even if we get a new government or cooperation, it will be hard for a new government to realise important reforms," Oertmann added.
Reporting by Samuel Indyk and Amanda Cooper; Editing by Barbara Lewis and Sharon Singleton
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