Euro zone bond yields fall as U.S. inflation cools in July

Euro zone government bond yields fell on Friday after U.S. inflation data for July came in below expectations, reinforcing expectations for Federal Reserve policy easing and lifting demand for longer-dated debt.

Germany’s 10-year Bund yield, a regional benchmark, declined to its lowest level in two weeks, down around 5 basis points at 2.32%, as investors priced in a higher probability of earlier-than-anticipated rate cuts by major central banks. The yield on the U.S. 10-year Treasury note also eased to 4.01%, reflecting a broad-based retreat in global yields.

The U.S. Labor Department reported on Friday that the consumer price index rose 0.2% month-on-month in July, below the 0.3% consensus forecast, while the annual rate slowed to 3.2% from 3.3% in June. Core inflation, which excludes food and energy, increased 0.2% on the month and 3.3% year-on-year, matching expectations but still remaining above the Fed’s 2% target.

Market pricing suggests a roughly 70% chance that the Federal Reserve will deliver a 25-basis-point rate cut at its September policy meeting, according to CME Group’s FedWatch tool. Traders are also pricing in additional easing by year-end, with expectations for a total of 50 basis points of cuts through December.

The softer inflation print follows recent remarks from Fed officials, including Chair Jerome Powell, who indicated that further progress on inflation would be needed before considering policy adjustments. However, the July data has shifted market expectations toward a more dovish stance, particularly as other major economies, including the euro zone, show signs of slowing growth.

In the euro zone, economic activity has weakened in recent months, with purchasing managers’ indices pointing to contraction in manufacturing and tepid expansion in services. The European Central Bank held rates steady at its July meeting but left the door open to further reductions if inflation continues to ease sustainably toward its 2% target.

The decline in yields reflects a broader shift in global fixed-income markets, where investors are reassessing the trajectory of monetary policy amid signs of cooling price pressures and softer economic momentum. The move also supports demand for risk assets, including equities, as borrowing costs decline.

The next key data points to watch include the U.S. producer price index, due next week, and euro zone inflation figures for July, scheduled for release on August 19.