Euro zone bond yields dip after softer U.S. inflation data

Euro zone government bond yields edged lower on Wednesday after data showed U.S. inflation cooled more than forecast, lifting demand for core euro area debt.

Germany's 10-year Bund yield, a regional benchmark, fell below 2.5% for the first time in over a week, declining roughly 3 basis points to 2.48%. The move mirrored declines in U.S. Treasury yields, which also retreated following the softer-than-expected consumer price index reading for May. The U.S. CPI rose 3.3% year-over-year, below the 3.4% consensus and down from 3.4% in April.

The European Central Bank's policy-sensitive 2-year Bund yield dropped 2 basis points to 2.85%, while French 10-year OAT yields fell 4 basis points to 2.92%. Italian 10-year BTP yields, which typically trade at a premium due to fiscal concerns, eased 5 basis points to 4.05%. The spread between Italian and German 10-year yields narrowed slightly to 157 basis points.

Traders cited reduced expectations for aggressive Federal Reserve rate hikes as the primary driver of the decline in global yields. The probability of a 25-basis-point Fed rate cut in September rose to around 60%, up from about 45% a day earlier, according to CME Group's FedWatch tool.

The euro was little changed against the dollar, trading near $1.0850, as currency markets digested the inflation data and its implications for global monetary policy. European stock markets showed muted reactions, with the Euro Stoxx 50 index up 0.2%.

Analysts noted that while the U.S. inflation print was a key catalyst, euro zone yields remained supported by expectations of ECB rate cuts later this year, with markets pricing in around 40 basis points of easing by December.