European zone government bond yields fell on Friday after French and German economic survey data showed weaker-than-expected results, indirectly supporting expectations for a key rate cut.
Weak demand prompted a drop in business activity in France as the country heads to snap parliamentary elections. In addition, the increase in Germany was slow in June.
European area business growth slowed sharply this month as demand fell for the first time since February.
The survey "shows a strong recovery in the European zone economy is not yet certain", said Franziska Palmas, senior European economist at Capital Economics.
"Meanwhile, aggregate price pressures continue to ease but remain strong in the services sector, which will cause ECB policymakers to be cautious," he added.
Money markets are counting on a 68 bps European Central Bank rate cut by the end of the year from 65 bps before the PMI data, which points to a further move and a 70% chance of a third cut in 2024.
Bond yields are on track for a small weekly rise, as hopes that France's right-wing National Rally (RN) party will withdraw costly fiscal promises halted last week's surge.
German 10-year bond yields, the benchmark for the European region, fell 4.5 basis points to 2.38% and are expected to end the week 2 bps higher.
The RN is seen leading the first round of the country's parliamentary elections with 35% of the vote, according to a poll released on Thursday. The center party camp of President Emmanuel Macron was in third place with 20% of the vote.
Market sentiment towards France and the most indebted countries in the European zone rose on Thursday as the market went through the French bond auction without any major problems.
However, apart from that, there is hope of monetary easing ahead after the Swiss National Bank slightly surprised the market by cutting rates, and the Bank of England delivered a dovish message, analysts said.
Italy's 10-year yield remained at 3.916%, while the Italian-German yield gap stood at 152 bps.
The euro lost 0.12% to trade at 1.0687.
