Euro zone long-dated yields fall, inflation below ECB target

Long-dated euro zone government bond yields fell on Tuesday, as slowing euro zone inflation buoyed expectations for a European Central Bank rate cut this week, while a strong Japanese auction earlier lifted sentiment across big bond markets. German 10-year bond yields were last down 2 bps to 2.505%, having earlier hit their lowest level since May 8.

Elsewhere, Italian 10-year bond yields fell to three-month lows at around 3.48%, as did French yields, which touched 3.15%. Data on Tuesday showed consumer price inflation in the 20 countries sharing the euro

slowed to 1.9% in May from 2.2% a month earlier, dipping below the ECB's 2% target.

The figures came in below expectations for 2.0% on a fall in energy prices and a sharp decline in services inflation. The data bolsters bets on a rate cut at the ECB's next meeting on Thursday.

Traders are currently placing a 95% chance on a 25-bp cut on Thursday, which would be its eighth cut since last June to the bank rate, currently at 2.25%. "...like many among us the ECB is trying to make sense of the trade negotiations with the U.S. - where do we land, what does it mean for inflation and growth?" said Kenneth Broux, head of corporate research FX and rates at Societe Generale.

He said that bonds have been in limbo amid few answers, a data-dependent outlook and no pre-commitment from the central bank. In addition, a stronger euro helps offset some of the impact of higher inflation on the economy. Analysts said positive sentiment in European debt markets on Tuesday, where the fall in yields implied a rise in prices, was supported by a strong government bond auction in Japan.

Recent tepid auction results for longer-dated debt in the United States and Japan have raised concerns about the ability of major economies to sell their bonds against a backdrop of concern about high debt levels. On Tuesday 10-year Japanese government bond (JGB) yields fell after results of an auction of the securities saw the highest demand since April last year.

U.S. Treasuries outperformed on Tuesday, falling 4 bps to 4.4181%. Markets were awaiting key U.S. employment data due later in the session.

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