Euro zone bond yields nudge up, focus on central banks, Middle East

Euro zone bond yields inched higher on Monday after a more cautious tone on monetary easing from the European Central Bank contrasted with expectations that the US Federal Reserve will soon start cutting its own interest rates.

The German 10-year bond yield, the benchmark for the euro zone bloc, rose 1.2 basis points to 2.24 per cent. Germany's two-year bond yield was little changed at 2.37 per cent.

Italy's 10-year yield was up 1 bp at 3.58 per cent, and the gap between Italian and German bunds stood at 133 bps.

Euro area government bond yields fell on Friday, tracking declines in US Treasury yields, after Fed Chair Jerome Powell endorsed an imminent start to rate cuts, saying "the time has come for policy to adjust".

Traders are fully pricing in a 25 basis point (bps) rate cut from the Fed next month, with the odds of a super-sized 50 bps rate cut growing to 39 per cent from 24 per cent a week ago, market pricing showed.

ECB chief economist Philip Lane struck a more cautious note at the weekend over the situation in the euro zone, saying the central bank was making "good progress" in cutting inflation back to its 2 per cent target but success is not yet assured.

Speaking at the Fed's annual economic symposium in Jackson Hole, Lane said on Saturday: "The monetary stance will have to remain in restrictive territory for as long as needed to shepherd the disinflation process toward a timely return to the target."

Traders are also keeping an eye on a fresh spike in tensions in the Middle East after Iran-backed Hezbollah launched hundreds of rockets and drones at Israel, in one of the biggest clashes in more than 10 months of border warfare.