Euro zone bond yields fall after US inflation data

Updates to European afternoon trading

By Greta Rosen Fondahn

Jan 15 (Reuters) - Euro area benchmark Bund yields fell on Wednesday, breaking a 10-day rising streak, as core U.S. consumer price inflation came in below expectations in December, bringing back bets on two Federal Reserve interest rate cuts in 2025.

While U.S. consumer prices rose 2.9% in the 12 months through December as expected, core inflation, which excludes food and energy prices, was 3.2%, below the 3.3% consensus forecast.

Germany's 10-year yield DE10YT=RR had dipped earlier in the day, and extended the fall after the data. If sustained, it would be its biggest daily fall since mid-June.

It was last down 9 basis points at 2.53%, around its lowest since Jan. 9, after hitting a fresh seven-month high at 2.63% earlier on Wednesday.

Strong economic data and fears that U.S. President-elect Donald Trump's policies could boost inflation have driven yields up on both sides of the Atlantic since early December.

But traders of interest-rate futures on Wednesday were pricing close to even odds the Fed will cut rates twice by the end of this year.

Before the report, interest-rate futures reflected bets on only a single reduction this year.

The U.S. 10-year Treasury yield US10YT=RR was down 12 bps at 4.6694% after hitting 4.8090% on Tuesday, the highest level since Nov. 1, 2023.

Pepperstone strategist Michael Brown said the core consumer price index data pointed to "some degree of underlying price pressures beginning to fade" but argued the Fed still remained on course to hold rates steady at the January meeting.

"Taking a step back, the CPI figures don't add particularly much to the broader discourse, instead, serving to reaffirm that underlying price pressures remain relatively stubborn."

In Europe, money markets slightly added to their bets on European Central Bank rate cuts this year by around 5 bps after the U.S. data.

Markets still expect the ECB to cut rates by around 95 basis points in 2025. EURESTECBM8X9=ICAP

Germany's 2-year bond yield DE2YT=RR, more sensitive to ECB rate expectations, fell 7 bps to 2.249% after hitting a fresh 2-1/2-month high at 2.323%.

Euro zone industrial production rose as expected in November but the latest data was unlikely to signal any major turnaround for a sector in its second year of recession.

Italy's 10-year government bond yield IT10YT=RR was down 15 bps at 3.681%, on track for its biggest daily fall since mid-May, while the gap between Italian and German yields DE10IT10=RR narrowed to 115 bps.

(Reporting by Greta Rosen Fondahn and Stefano Rebaudo; Editing by Bernadette Baum, Jacqueline Wong, Hugh Lawson, Tomasz Janowski and Richard Chang)

((Greta.RosenFondahn@thomsonreuters.com))