Euro zone bond yields fall to two-week low on US influence

LONDON, Feb 27 (Reuters) - Euro zone bond yields fell to a two-week low on Thursday, pulled down by a fall in U.S. yields on the back of weaker-than-expected data as well as uncertainty about defence spending in Europe.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, fell to 2.412% in early trading, the lowest since Feb. 11, and was last down 1 basis point (bp). Yields move inversely to prices.

Euro zone bond yields rose in mid-February as investors braced for more defence spending as U.S. President Donald Trump embarked on talks with Russia over ending the war in Ukraine.

But they have since dipped, influenced in part by a sharp drop in U.S. Treasury yields as weak private sector and consumer sentiment data has surprised investors, and also as incoming German Chancellor Friedrich Merz has cast doubt on a big military spending boost in the country.

​Italy's 10-year yield IT10YT=RR was little changed​ at 3.492%, and the gap between Italian and German yields DE10IT10=RR stood at 106 bps.

The spread between U.S. 10-year Treasuries and German yields DE10US10=RR widened to 186 bps after falling to its lowest since November at 182 bps on Wednesday.

Traders who bet on the future course of inflation foresee the sharpest divergence for three years between the U.S. and euro zone, partly driven by Trump's tariff threats, which he renewed on Wednesday.

Yet the spread between U.S. and European yields has narrowed as investors focus on recent tepid U.S. economic data, despite sticky prices, and more euro zone defence spending.

Germany's two-year bond yield DE2YT=RR, which is more sensitive to European Central Bank rate expectations, was last down 2 bps at 2.05%, around its lowest since mid-February.