Euro zone yields lower after US data

By Stefano Rebaudo and Linda Pasquini

June 11 (Reuters) - Euro zone government bond yields reversed course to trade lower on Wednesday after cooler-than-expected U.S. consumer inflation data and as investors assessed progress in talks to ease U.S.-China trade tensions.

President Donald Trump said a deal was struck hours after Washington and Beijing agreed on a framework at talks in London to get a fragile trade truce back on track and remove Chinese export restrictions on rare earth minerals and other critical industrial components.

Germany's 10-year bond yield DE10YT=RR, the euro area's benchmark, was 1 basis point lower at 2.524%, having been at 2.55% before the data, while German two-year yields DE2YT=RR fell 1 basis point to 1.84%.

U.S. consumer prices increased only marginally in May, coming in below expectations due to cheaper gasoline. But inflation is expected to accelerate in the coming months on the back of the Trump administration's import tariffs.

July and August will likely see much stronger numbers, according to James Knightley, chief international economist at ING.

"Nonetheless, tariffs are a one-off price hike that will drop out of the annual comparison in late summer 2026," Knightley wrote in a note to clients.

"We still see an excellent chance of inflation getting down to 2% in late 2026 and that keeps the door open to Fed rate cuts late in 2025."

Markets now price in 51 bps of cuts by the end of the year, but still expect the Federal Reserve to keep interest rates unchanged next week.

That sent U.S. Treasury yields lower, and global bond yields tracked the move. US/

In Europe, negotiated wage growth across the 20-nation euro zone is seen at 3.1% this year, the ECB's monthly wage tracker showed. The ECB has long argued that wage growth around 3% would be consistent with its 2% inflation target.

Analysts see some chance that inflation falls significantly below that target, but the ECB's chief economist Philip Lane said on Wednesday that the central bank's latest rate cut will help inflation bounce back to goal after an expected sag over the next year and a half.

Money markets are also fully pricing an ECB rate cut of 25 bps by December EURESTECBM4X5=ICAP and reflect an around 60% chance of that coming as soon as September. EURESTECBM2X3=ICAP

Italian 10-year yields IT10YT=RR were down 1.5 bps at 3.439%, leaving the gap between German and Italian yields DE10IT10=RR at 88.50 bps. The spread hit 86.70 bps on Tuesday, its lowest level since February 2021.

Meanwhile, Britain's borrowing costs also eased after the U.S. data, having been elevated as traders eyed a multi-year spending review which underlined the country's fiscal challenges just as pressure mounts to boost the economy.

Britain's 10-year gilt yield GB10YT=RR was up 0.7 bps at 4.55%, down from its session high of 4.62%.