Euro zone bond yields fall, take cues from Treasuries

By Lucy Raitano

LONDON, May 15 (Reuters) - Euro zone bond yields fell on Thursday, taking cues from U.S. Treasuries as soft inflation, retail sales and factory data kept Federal Reserve rate cuts on the table for later this year.

Germany's 10-year yield DE10YT=RR, the euro area's benchmark, was down 5.5 basis points (bps) to 2.638%, though it remained close to an almost one-month high of 2.7% reached earlier in the day.

Germany's 2-year yield DE2YT=RR, more sensitive to changes in expectations for monetary policy, was down 6 bps at 1.884%.

U.S. producer prices unexpectedly fell in April, pulled down by ebbing demand for air travel and hotel accommodation. Meanwhile, retail sales growth slowed last month and industrial output remained unchanged .

"To me it's more about a U.S. story rather than a European story, of course bunds trade in tandem with treasuries ... the biggest driver for bund yields is actually not European domestics right now, it's much more external factors," Mohit Kumar, chief economist and strategist for Europe at Jefferies, said.

U.S. Treasury yields fell across the curve, with the 10-year benchmark US10YT=RR down 4 bps at 4.4966%.

The data was "friendly for inflation and Fed cuts", said Kenneth Broux, senior strategist at Societe Generale in London.

Markets are pricing in about 55 bps of easing from the Federal Reserve by the end of the year, implying two quarter-point rate cuts and about a 20% chance of a third.

The first rate cut for the Fed is fully priced at the September meeting.

Investors are also pricing in about 50 basis points of cuts for the European Central Bank this year, with a 25 basis point move priced for the June meeting.

Today's data reflects the uncertainty caused by U.S. President Donald Trump's import tariffs announced on April 2 which sent markets into a tailspin and had investors shunning U.S. assets, including Treasuries.

On Monday, the U.S. and China announced a truce, lowering tariffs for 90 days, which sent equities higher across the globe, although analysts still expect market volatility to continue this year.

"The policymaking itself is generating considerable uncertainty and to our minds this uncertainty has not been dispelled by the de-escalation" said Richard McGuire, head of rates strategy at Rabobank.

Italy's 10-year yield IT10YT=RR fell 5.5 bps to 3.659%, keeping the spread between Italian and German 10-year yields at about 99 bps, close to its tightest level since April 2021.