Euro zone bond yields slip after Italian inflation cools

Euro zone government bond yields ticked lower on Wednesday after Italian inflation data came in cooler than expected and separate figures showed lending in the bloc was slowing.

Euro zone government bond yields ticked lower on Wednesday after Italian inflation data came in cooler than expected and separate figures showed lending in the bloc was slowing. Italian inflation, when adjusted to compare across the European Union, slowed to 6.7% year-on-year in June from 8% in May, preliminary figures showed on Wednesday. Economists expected a 6.8% reading.

Core inflation - which strips out food and energy costs - also slowed. The Italian data comes ahead of euro zone-wide figures on Friday. Yields fell slightly, particularly those on shorter-dated bonds that are sensitive to interest rate expectations.

Italy's 2-year yield was last down 1 basis point (bps) to 3.795%. Germany's 2-year yield was down 4 bps at 3.192%, meanwhile. Yields move inversely to prices. "The drop in Italy's headline and core inflation in June is encouraging," said Franziska Palmas, senior Europe economist at consultancy Capital Economics.

Yet she added: "That said, the European Central Bank is likely to remain in hawkish mood. Indeed officials... are clearly concerned about the tight labour market causing stickiness in services inflation." Just before the inflation figures, data showed euro zone bank lending slowed in May in the wake of the ECB's rapid campaign of interest rate hikes.

Investors were also waiting to hear from an all-star cast of central bankers on Wednesday. A 1330 GMT session at the European Central Bank's annual forum in Sintra, Portugal will see ECB President Christine Lagarde, Fed Chair Jerome Powell, Bank of England Governor Andrew Bailey and Bank of Japan Governor Kazuo Ueda discuss monetary policy.

Germany's 10-year bond yield, the benchmark for the bloc, was 4 bps lower at 2.328%. It rose 7 basis points (bps) on Tuesday, when strong U.S. economic data caused investors to increase their bets on a Federal Reserve interest rate hike next month.

Italy's 10-year yield was down 2 bps at 3.986%. Traders who bet on the path of interest rates expect ECB borrowing costs to peak at just below 4% in December, from 3.5% currently.

For some analysts and investors, interest rates at 4% are likely to cause growth to slow sharply, if not cause an outright recession. The German yield curve - the gap between the 10-year and 2-year bond yields - was at its deepest inversion since 1992 on Tuesday at -89 bps, in a sign that traders think the ECB will likely have to cut rates to deal with slowing growth in the not too distant future. It last stood at -87 bps on Wednesday.