Euro zone bond yields fall for fourth straight day as inflation cools

Euro zone bond yields fell for a fourth consecutive day on Thursday as investors took heart from data which suggested global inflationary pressures are cooling. Germany's 10-year bond yield was last down 1 basis point (bp) at 2.257%, and was on track for its biggest weekly fall since mid-March, having dropped 28 bps since Monday.

Euro zone bond yields fell for a fourth consecutive day on Thursday as investors took heart from data which suggested global inflationary pressures are cooling.

Germany's 10-year bond yield was last down 1 basis point (bp) at 2.257%, and was on track for its biggest weekly fall since mid-March, having dropped 28 bps since Monday. Yields move inversely to prices. Figures released on Thursday showed that

euro zone inflation eased to 6.1% in May from 7% in April, below the 6.3% figure expected by economists.

Core inflation, which strips out energy and food costs, also fell more than expected to 5.3%, from 5.6% in the prior month. "Underlying inflation is now lower than in the U.S. and this will take the steam out of European Central Bank rate hike expectations," said Ben Laidler, global market strategist at trading platform eToro.

The reaction in euro zone bond markets was relatively muted because data from individual countries had already shown big falls in inflation

in May, pulling yields lower earlier in the week. However, U.S. economic data added to the downward pressure on yields later in the session.

A raft of reports showed that weekly jobless claims rose slightly

last week; that labour costs have been revised sharply lower

over the last two quarters; and that the ongoing manufacturing slump continued in May

. The fall in Italian yields was particularly pronounced. Italy's 10-year rate was last down 8 bps at 4.014%.

That took the closely watched gap between Italy and Germany's 10-year yields to 175 bps, the lowest since early March. Taken together, the European and U.S. data has caused investors to hope that their respective central banks may not have to raise interest rates much further, weighing on yields.

According to pricing in derivatives markets, traders think there's a 70% chance the U.S. Federal Reserve will hold its benchmark overnight interest rate in the current 5.00%-5.25% target range. Traders reckon the ECB is likely to hike twice more, by 25 bps in both June and July, taking interest rates to 3.75%. But many analysts said this week's data makes hikes after that unlikely.

"The absence of any surprise upswings in inflation data today diminishes the prospect of further tightening beyond July," Gurpreet Gill, fixed income strategist at Goldman Sachs Asset Management, said in emailed comments. Germany's 2-year yield, which is particularly sensitive to interest rate expectations, was last up 1 bp at 2.751%, although it was on track for a weekly fall of 23 bps.