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Euro zone bond yields were steady on Wednesday, holding above last week's multi-month lows, as investors awaited fresh impetus before the European Central Bank's policy meeting next week where another rate cut is likely.
ECB rate-setters Francois Villeroy de Galhau and Yannis Stournaras both hinted that the bank will likely lower borrowing costs by another quarter-point when it announces policy on Thursday, following interest rate cuts in June and September.
That message is fully in line with expectations as more than 90% of economists
polled by Reuters
anticipate a 25-basis-point (bps) cut next week with a similar majority betting on a follow-up move in December.
"When markets are more or less fully pricing it, it's fair to assume that it's more or less a done deal," said Anders Svendsen, chief analyst at Nordea.
"The central banks would rather over-deliver in terms of rate cuts relative to market expectations than under-deliver."
Germany's two-year yield, sensitive to changes in interest rate expectations, was down 0.5 bps at 2.225%.
The euro zone benchmark, Germany's 10-year yield , was last down less than 2 bps at 2.231%. It hit its lowest level since January at 2.011% last week before rising on the back of strong U.S. economic data.
Bund yields have only reacted moderately to the recent uptick in oil prices, which will need to move markedly higher to change the market's conviction in an ECB rate cut next week, said Benjamin Schroeder, senior rates strategist at ING said.
Yields, which move inversely to prices, slumped to multi-month lows early last week as investors priced in an October cut spooked by data showing slowing growth, particularly in the bloc's largest economy, Germany.
However, late last week yields jumped across the board to multi-week highs as a strong U.S. jobs report spurred wagers against an aggressive U.S. rate-cutting cycle.
Expectations of a 25-bps rate cut at the Federal Reserve's November meeting are now at 87%, according to CME's FedWatch tool, with traders pricing in virtually no chance of a larger 50-bps move, down from a one-in-three chance priced in last week.
Given the lack of major domestic data and the recent impact of U.S. data and rate outlook on euro zone bonds, the minutes from the Federal Reserve's meeting due later in the day will be closely watched for hints on what the policy-setting committee's thinking was about a larger than usual 50-bps rate cut last month.
Elsewhere, France's 10-year bond yield was last down 1 bps at 3.005%, just below a more than one month's high at 3.040% a day earlier, showing little reaction to French Prime Minister Michel Barnier passing the first test of his new government on Tuesday.
A leftist no-confidence motion failed to garner enough votes to bring down Barnier's centre-right government.
All eyes are now on his first budget proposal, due to be unveiled on Thursday and likely to include bruising tax hikes and spending cuts totalling some 60 billion euros ($65.9 billion) to bring down an ever-widening deficit.
Italy's 10-year yield fell 1 bp to 3.543%, pushing the spread between Italian and German 10-year yields to 130.50 bps.
(Reporting by Samuel Indyk and Medha Singh; editing by Andrew Heavens and Mark Heinrich)