Euro zone bond yields dip as factory activity remains weak
Updates at 1015 GMT
By Harry Robertson
LONDON, June 3 (Reuters) -Euro zone bond yields fell slightly on Monday after data showed the bloc's factory activity remained weak in May, but the moves were muted as traders awaited a likely European Central Bank rate cut on Thursday.
Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, fell 2 basis points (bps) to 2.626%.
Final readings of survey-based gauges of Europe's manufacturing sector showed activity remained below the mark denoting growth for a 23rd month.
The purchasing managers' index surveys also came in slightly lower than preliminary readings, although the downturn was still moderated compared to April.
"Overall, these data suggest that conditions in manufacturing remained difficult midway through Q2," said Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics.
"But they also clearly signal that the recession...is now easing."
Italy's 10-year yield IT10YT=RR was down 4 bps at 3.92%, and the gap between Italian and German yields DE10IT10=RR narrowed to 129 bps.
The market's focus this week is on the ECB's interest rate decision on Thursday, when it is all but certain to cut rates to 3.75%, from the current record high of 4%.
Investors will be looking out for any hints about when the next reduction might come, with some on the ECB's Governing Council pushing back against the idea of a July cut. Data last week showed that euro zone inflation was stronger than expected in May.
Germany's two-year bond yield DE2YT=RR, which is more sensitive to European Central Bank rate expectations, was down 1 bp at 3.069%.
"While there is a consensus on this first rate cut, the pace of future cuts is already subject to lively debate within the Council," said Franck Dixmier, global chief investment officer for fixed income at Allianz Global Investors, in emailed comments.
"Future inflation data is likely to be volatile, and the ECB is likely to caution that it is sticking to its gradual approach to cutting rates."
French bonds showed little notable reaction to ratings agency S&P downgrading the country's credit rating late on Friday.
Just before the EU's parliamentary elections, S&P cut France's rating to "AA-" from "AA", saying higher than expected deficits would push up debt in the euro zone's second-biggest economy.
France's 10-year bond yield FR10YT=RR was down 3 bps at 3.108%, broadly in line with the move in other euro zone country bonds.
The spread between U.S. 10-year Treasury and German bund yields DE10US10=RR held steady at 185 bps.
Traders slash ECB rate cut bets Traders slash ECB rate cut bets https://reut.rs/3R8iXAV
Reporting by Harry Robertson
Editing by Bernadette Baum and Ros Russell
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