LONDON, April 19 (Reuters) - Euro zone bond yields fell on Friday as investors tried to reduce risk ahead of the weekend after reports of an Israeli attack on Iran.
Israel launched an attack on Iran on Friday, sources said, in the latest exchange between the two adversaries. But Tehran played down the incident and indicated it had no plans for retaliation - a response that appeared gauged towards averting region-wide war.
"Today is likely to be all about geopolitics", said Mohit Kumar Chief Economist Europe at Jefferies. "The ball now lies with Iran as to its response. What is interesting is that there have been no strong statement of retaliation from Iran".
"Given Friday, we would see position unwinds as investors try to go home neutral into the weekend," he added.
German 10-year bond yields, the benchmark for the euro zone bloc, fell 2.4 basis points (bps) to 2.47%, moving away from a more than six-week high touched on Tuesday.
Italy's 10-year yield was lower by 1.7 bps at 3.87%, and the gap between Italian and German bunds narrowed 1.5 bps to 139 bps, after briefly hitting 144.9, its highest point since early March.
The spread between U.S. 10-year Treasuries and German bunds narrowed 2.2 bps to 212 bps, after touching its lowest level in 9 days.
Beyond geopolitics, investors focused on the interest rate outlook as ECB policymakers continued to line up behind a June interest rate reduction.
But markets see just three ECB rate cuts this year, a big shift from two months ago when between four and five moves were expected.
In the United States, the Federal Reserve is re-evaluating the need for any interest rate cuts this year in the face of resilient economic data and ongoing strength in the labour market.
Finance chiefs across the world are scrambling to keep pace with the Fed's rapid resetting of rate-cut expectations.
According to a majority of 100 economists polled by Reuters, the Fed will wait until September to cut its key interest rate, with half of the respondents saying there will be only two cuts this year.
Germany's two-year bond yield, which is more sensitive to European Central Bank rate expectations, was little changed 2.97%.
(Reporting by Joice Alves. Editing by Gerry Doyle and Jane Merriman)
