Euro zone bonds steady; investors wary of US policy outlook

LONDON, August 4 (Reuters) - Euro zone government bond yields held steady on Monday, having posted their largest weekly decline in two months, in stark contrast with a drop in U.S. yields after a dismal jobs report sparked a surge in bets on a Federal Reserve cut in September.

Friday's monthly U.S. employment data showed far fewer jobs than expected were created in July and the May and June numbers were drastically revised downwards, prompting a rapid reassessment of the chances of a September rate cut and for President Donald Trump to sack a top Labor Department official.

Yields on the benchmark 10-year German Bund were up around 1 basis point in early trading at 2.685%, having fallen by 3.9 bps last week, their largest weekly decline since the end of May.

The premium of U.S. Treasuries over Bunds, the benchmark for the wider euro area bond market, held around 155.6 bps, near its narrowest since early April, as 10-year Treasury note yields skimmed three-month lows around 4.24%.

Money markets show traders now expect two more rate cuts from the Fed this year, with the next one likely in September, compared with no more cuts from the European Central Bank for the time being.

Two-year Schatz yields were also flat on the day at 1.911%. Italian and French bonds weakened a touch, leaving 10-year BTP yields up 2.6 bps on the day at 3.559%, while 10-year OAT yields rose 2.3 bps to 3.369%. (Reporting by Amanda Cooper; Editing by Bernadette Baum)