LONDON, July 16 (Reuters) - Euro zone government bond yields fell for a second day on Tuesday as investors looked ahead to the European Central Bank's policy announcement on Thursday, with data hinting at a further slowdown in Germany, Europe's largest economy.
Germany's 10-year bond yield, the euro area's benchmark, was last down 3.5 basis points (bps) at 2.437%. It fell 2.5 bps on Monday.
Yields have fallen this month as inflation readings have eased in both Europe and the U.S., adding to expectations that major central banks could lower borrowing costs in the coming months.
The ECB will announce its latest policy decision on Thursday, when it 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 the meeting on Thursday and around an 85% chance of a quarter-percentage-point cut in September, LSEG data showed.
Germany's policy-sensitive two-year yield was last down 2.5 bps at 2.768%, having earlier fallen to its lowest level since June 21.
POLITICAL UNCERTAINTY
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 the Nov. 5 presidential election might have increased and that his policies could reignite inflation in the U.S. and increase the U.S. budget deficit.
The benchmark U.S. 10-year yield, which had risen on Monday, was down 3 basis points on Tuesday at 4.2%. Strong
U.S. retail sales data
caused yields to trim their decline.
"There doesn't seem to be a long-lasting impact (from the assassination attempt) for the market right now," said Sophia Oertmann, an 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," she said, referring to the June 27 debate between Trump and President Joe Biden.
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 was last down 2 bps at 3.091%, after earlier hitting its lowest level since June 7, the last trading day before Macron called the snap election.
The yield gap between French and German 10-year bonds stood at 65 bps, around 15 bps wider than where it was before June 9.
That gap, a closely watched measure of risk, 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 realize important reforms," she added. (Reporting by Samuel Indyk and Amanda Cooper; Editing by Barbara Lewis, Sharon Singleton and Paul Simao)
