Euro zone bonds tread water after Fed minutes and Lagarde speech

"We need to remain focused on bringing inflation back to our target." ECB's Mario Centeno, seen as a policy dove, said he expected macroeconomic conditions would lead to a reversal in the bank's recent cycle of rate hikes in the near future. The gap between Italy and Germany's 10-year yields , a gauge of investor sentiment towards the euro zone's more indebted countries, was 1 bp lower at 174 bps.

Euro zone bonds were little changed on Wednesday after central bank officials did little to disabuse investors' hopes that the next move in interest rates will be down. Germany's 10-year bond yield, the bloc's benchmark, was 1 basis point (bp) higher at 2.561%.

The yield touched a 12-year high of 3.024% in early October before dropping sharply as economic data in the U.S. and Europe suggested inflation would slow quicker than previously thought. Yields move inversely to prices. Italy's 10-year yield was flat at 4.32%, and down from an 11-year high of 5.025% in October.

Jussi Hiljanen, head of rates strategy at lender SEB, said trading was muted as U.S. investors prepared for the Thanksgiving holiday on Thursday. "Secondly, we have had quite massive movements over the past two weeks or so in many markets, including bond markets, so it's kind of a consolidation now."

Bond traders were showing little reaction to minutes from the U.S. Federal Reserve's last meeting at the start of November. They showed that officials agreed they would go "carefully" and raise interest rates only if progress in controlling inflation faltered. European Central Bank chief Christine Lagarde echoed this cautious message, which has become something of a mantra among central bankers, on Tuesday.

"This is not the time to start declaring victory," Lagarde said in Berlin. "We need to remain focused on bringing inflation back to our target." ECB's Mario Centeno, seen as a policy dove, said he expected macroeconomic conditions would lead to a reversal in the bank's recent cycle of rate hikes in the near future.

The gap between Italy and Germany's 10-year yields , a gauge of investor sentiment towards the euro zone's more indebted countries, was 1 bp lower at 174 bps. It hit a two-month low of 170 bps on Tuesday. Pricing in derivatives markets showed that investors expect the ECB to cut interest rates by around 90 bps by the end of next year, from the current record high of 4%. Those bets implied about 100 bps of cuts last Friday and in early November.

Germany's 2-year bond yield, which is sensitive to ECB interest rate expectations, was last up 4 bps at 3.01%. It hit a 15-year high of 3.393% in July but has since cooled. Elsewhere, British bond yields rose on Thursday, after UK finance minister Jeremy Hunt used his Autumn Statement budget update to cut business and household taxes.

U.S. Treasury yields pared early losses after rather strong initial jobless claims data unsettled a market that expects the Federal Reserve to start cutting rates around June next year. France's 10-year bond yield, was last up 1.5 bps at 3.13%.