Euro zone bond yields drop after US PCE inflation cools

Euro zone government bond yields fell on Thursday after data showed U.S. inflation cooled in January and jobless claims rose last week, bolstering investors' expectations that central banks will cut interest rates relatively sharply this year.

Euro zone government bond yields fell on Thursday after data showed U.S. inflation cooled in January and jobless claims rose last week, bolstering investors' expectations that central banks will cut interest rates relatively sharply this year. Germany's 10-year yield, the euro area's benchmark, was last down 5 basis points (bps) at 2.412%, having traded 4 bps higher at 2.497% before the U.S. data.

The benchmark yield earlier touched 2.513%, its highest level since Nov. 28, after data showed month-on-month regional German inflation remained relatively strong in February. Data on Thursday showed that U.S. personal consumption expenditures index (PCE) rose 2.4% year-on-year in January, down from 2.6% in December. Investors watch the PCE figure closely as it is the Federal Reserve's preferred inflation gauge.

Month-on-month, the measure ticked up slightly to 0.3% from 0.1%, in line with economists' expectations. "Ultimately the report was largely in line with economist estimates, which was seen a relief for investors who were concerned about the potential for hotter than expected inflation to start the year," Sam Millette, director of fixed income for U.S.-based Commonwealth Financial Network, said.

Germany's two-year yield, which is sensitive to changes in interest rate expectations, was down 3 bps at 2.894%. It had traded around 4 bps higher at 2.965% previously. Separate figures showed that weekly U.S. jobless claims rose to 215,000 last week from 202,000 the week before.

U.S. 10-year bond yields also fell and were last down around 5 bps. Euro zone yields have been highly sensitive to U.S. economic data in recent months as investors expect the Fed and European Central Bank to cut interest rates at around the same time. French numbers released earlier in the day showed inflation slowed slightly less than expected, to 3.1%, in February, down from 3.4% the month before. Spanish data showed EU-harmonised inflation falling to 2.9% as expected.

The euro-zone figure for February will be released on Friday. "If you look at the January numbers, the monthly increases were quite high and if that's the case again in February it will challenge the narrative of gradually falling inflation," said Anders Svendsen, chief analyst at Nordea.

Italy's 10-year yield, the benchmark for the euro zone's more indebted countries, was last down 4 bps at 3.852%.