Euro zone bond yields tumble as investors cheer cooling U.S. inflation

LONDON (Reuters) – Government bond yields across the euro area fell sharply on Thursday as investors continued to cheer signs that the US inflation outlook is improving, meaning peak interest rates are nearing.

Benchmark 10-year government bond yields from Germany to France and Italy were down 8-9 basis points (bps) each in early trade.

German 10-year Bund yields fell to as low as 2.47%, their lowest level in around a week.

That follows a 10 bps fall on Wednesday after US data showed consumer prices registered their smallest annual increase in more than two years in June.

Italian yields have tumbled over 20 bps in the past two sessions to around 4.18%.

“Markets have gone from moving towards a hard landing, super high inflation and rate hikes back to a soft landing (scenario),” said Peter Schaffrik, global macro strategist at RBC Capital Markets. “And you can see that also in higher equities.”

“It could change again but for now that’s what’s driving markets,” he added.

Analysts at ING said the US CPI data would not keep the Federal Reserve from hiking interest rates again in July, but further hikes looked less likely.

In Europe, rate hike bets have been pared back slightly following the US data, with focus turning to the release of minutes of the June European Central Bank meeting later in the day.

The ECB lifted rates by a quarter point in June and is widely expected to raise rates again when it meets later in July.

“The ECB will hike again and anything else would be a major surprise,” said Schaffrik.

(Reporting by Dhara Ranasinghe; Editing by Emelia Sithole-Matarise)