Euro zone bond yields tick up after hitting two-week low

Updates in early afternoon trading in Europe

By Harry Robertson

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, before ticking slightly higher on the back of some stronger-than-expected economic data.

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 February 11, and was last up 1 basis point (bp) at 2.451%. 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 3 bps higher at 3.52%, and the gap between Italian and German yields DE10IT10=RR widened to 107 bps.

Yields rose steadily throughout the morning session after opening slightly lower, nudged up by euro zone data.

Spanish inflation came in slightly stronger than expected in February, at 2.9%.

Separate European Commission figures showed euro zone economic sentiment improved in February, with consumer price expectations moving higher.

"Surveys so far this year, including Thursday's EC survey for February, suggest the economy remains very weak while inflationary pressures are still somewhat elevated," said Adrian Prettejohn, Europe economist at Capital Economics.

He said price pressures may worry ECB policymakers. They meet next week to decide on interest rates and markets are expecting another 25 bp cut, to 2.5%, and see two or three more reductions after that.

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 flat at 2.066%, not far above its lowest since mid-February.