Euro zone yields drop after data, await US economic indicators

By Stefano Rebaudo

April 30 (Reuters) - Euro zone government bond yields dropped on Wednesday after a batch of economic data led investors to slightly increase bets on the European Central Bank monetary easing path.

Inflation eased in four sizeable German states in February. In the most populous state of North-Rhine Westphalia, the year-on-year rate inched down in April to 1.8% from 1.9% in March.

Still in Germany, the gross domestic product (GDP) was in line with forecasts, and the unemployment rate rose less than expected but to its highest level since the pandemic.

France's harmonized inflation rate increased more than expected, while the economy grew slightly in the first quarter as companies rebuilt inventories.

Germany's 10-year yield DE10YT=RR, the euro area's benchmark, dropped 3 basis points (bps) to 2.46%.

U.S. Treasury yields fell in London trade -- with the 10-year US10YT=RR down 1.5 bps at 4.16% -- after dropping for the sixth consecutive day to a three-week low on Tuesday as data showed that U.S. job openings dropped sharply in March while consumer confidence hit an almost five-year low.

Money markets priced in European Central Bank deposit facility rate at 1.61% in December EURESTECBM5X6=ICAP from 1.64% before data. They also fully priced a 25 bps cut in June. EURESTECBM1X2=ICAP

Germany's 2-year yield DE2YT=RR, more sensitive to expectations for ECB policy rates, was down 1.5 bps to 1.73%.

"The German spending story has been pushed to the background amid tariff headlines and should become of more importance later this year and in 2026," said Michiel Tukker, senior European rates strategist at ING, arguing he sees higher EUR rates from a "structural perspective."

German parties reached a deal to massively increase fiscal spending to fund infrastructure and defence investments.

Germany's Social Democrats have backed a treaty for a coalition with the CDU/CSU conservatives, clearing the last hurdle for the formation of a new government.

"For now, it's risk sentiment driving rates markets, and any downside data surprises can easily trigger another leg lower for euro rates," ING's Tukker added.

Investors await U.S. data later in the session, including GDP growth rate and the Personal Consumption Expenditures (PCE) price index -- the Federal Reserve's favourite inflation gauge.

"A drop in U.S. GDP growth to 0% or below should not be over-interpreted as it is partly due to a rise in imports, in anticipation of the tariffs, which was not accompanied by the implied increase in inventories," said Hauke Siemssen, rate strategist at Commerzbank.

Italy's 10-year yield was down 2.5 bps, with the gap between Italian and German 10-year bond yields DE10IT10=RR at 109 bps.