LONDON, June 25 (Reuters) - Germany's 10-year yield dropped on Tuesday and the now closely watched spread between German and French bonds tightened a fraction as traders awaited economic and political developments later in the week.
The major scheduled macro economic event for government bonds globally is U.S. personal consumption expenditures inflation on Friday, the Fed's preferred measure. Preliminary inflation data from several European markets for June is also due that day.
Those releases will help shape market expectations of the date of the U.S. Federal Reserve's first interest rate cut this cycle and the European Central Bank's next move after it eased policy earlier this month.
Investors are also watching the first round of voting in the French parliamentary election on Sunday, as well as Thursday's U.S. presidential election debate.
The German 10-year bond yield on Tuesday fell 3 basis points to 2.39% having traded in a tight range for the past week.
It dropped sharply earlier in the month as the euro zone benchmark bond benefited from a flight to safety after French president Emmanuel Macron called a snap parliamentary election.
France's 10 year bond yield was last 4 bps lower at 3.10% and the spread between France and Germany's 10 year yields was 71 bps, down a fraction on the day, and down from above 80 bps earlier in the month.
Based on opinion polls, the far right National Rally (RN) is likely to be the largest party after the election, but fall short of an overall majority, with the left-wing New Popular Front (NFP) coalition second.
"Near-term political uncertainty in France has increased, resulting in a positive political risk premium in OATs (French government bonds). We expect this to remain until said uncertainty has been resolved," said analysts at Nomura in Tuesday note.
"For this, however, we believe either a RN majority or an impasse with a centrist technocrat appointed as PM is necessary. We expect uncertainty will remain elevated should the left-wing coalition NFP win an outright majority and be asked to form the government."
Fears the RN would adopt a fiscally profligate set of policies spooked markets initially, though Nomura said remarks from RN officials that they would respect the EU’s fiscal rules and not implement dramatic fiscal expansion meant they now thought "financial markets would react favourably to an outright RN majority".
Elsewhere, Italy's 10-year yield was lower by 2 bps at 3.91%, and the gap between Italian and German bund yields widened a touch to 151 bps. (Reporting by Alun John Editing by Tomasz Janowski and Peter Graff)
