Euro zone government bonds held largely steady on Friday, treading water following a sell-off in the previous session after the Federal Reserve sounded a hopeful note on the US economy, spurring bids for more risky assets. Activity was subdued with no trading in Bund futures as most European markets were shut for the May Day holiday.
At 0608 GMT, two-year government bond yields were one basis point up at 1.382 percent, while 10-year yields were little changed at 3.163 percent.
Strategists and traders said they expected thin trading conditions to persist until Tuesday, due to holidays in Japan and the UK on Monday.
"The normal expected reaction in such circumstances would be for market participants to square up and `go neutral', particularly given the headline risk over the period (swine flu)," said Charles Diebel, an interest rate strategist at Nomura in London.
"This should make the performance of risk assets all the more noteworthy over the next couple of sessions because, if apparent demand is sustained, it will underline how underweight risk investors are, potentially driving demand even further," he said in a note. With most European markets shut, the market is looking to the monthly US ISM report on manufacturing for any clues on recovery of the world's biggest economy.
Investors' focus is also turning to the European Central Bank's policy meeting next Thursday at which it is expected to cut its key refinancing rate by 25 basis points to 1.0 percent.
It is also expected to announce other ways to ease monetary policy, such as lengthening the maturity of its refinancing operations to 12 months from six or buying corporate or bank bonds.
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