Euro zone bond yields steady as markets assess US, UK inflation data

By Lucy Raitano

LONDON, July 16 (Reuters) - Euro zone government bond yields edged slightly lower on Wednesday, as markets assessed U.S. inflation figures released Tuesday that suggested tariffs may be pushing up prices while the latest hot UK inflation data pushed gilt yields higher.

The June CPI data out of the U.S. on Tuesday showed an increase of 0.3%, suggesting tariffs are reading through to prices, and spurring investors to slightly scale back their bets on Federal Reserve rate cuts with Wall Street markets falling late on Tuesday as treasury yields rose.

But the mood was decidedly muted on Wednesday, with German 10-year yields DE10YT=RR, the euro area's benchmark, down a mere 1 bps to 2.7%, hovering just off a nearly four-month high of 2.737% scaled on Monday.

"It's relatively quiet - no spillover from UK CPI to Europe. A pause after a run up in yields makes sense. I'm keeping a close eye on stocks after profit warnings .. that puts a brake on yields," said Kenneth Broux, head of corporate research FX and rates at Societe Generale.

The two-year yield – more sensitive to expectations for European Central Bank policy rates – was also down 1 bp to 1.86% DE2YT=RR.

The German 30-year yield DE30YT=RR was down 1 bps at 3.23%, having risen to its highest level since October 2023 on Monday, touching 3.26%.

Markets are looking ahead to U.S. producer price data due later to assess the extent of inflationary pressures in the U.S.

UK CPI data meanwhile showed Britain's annual rate of consumer price inflation unexpectedly rose to its highest in over a year, at 3.6% in June.

The print meant UK 10-year gilts GB10YT=RR were a rare outlier, rising 2 bps to 4.65%, while most of the other major government bonds yields were slightly down.

Markets are focused on U.S. President Donald Trump's ongoing trade war, with his latest move being a 19% tariff on goods from Indonesia under a new agreement with the Southeast Asian country.

It comes as the European Union is readying retaliatory measures should talks with Washington fail.

Planned U.S. tariffs of 30% on imports from the EU could cost the German economy about a quarter of a percentage point in growth this year and next compared with current forecasts, the IMK institute said on Wednesday.

Elsewhere, the German cabinet approved on Wednesday a medium-term fiscal plan that will be submitted to the European Commission, a spokesperson from the finance ministry said.

Italian EU-harmonised consumer prices (HICP) rose 0.2% month-on-month in June and were up 1.8% from the year earlier, official statistics agency ISTAT said on Wednesday, slightly revising up preliminary data.

The European Union statistics office on Wednesday said the euro zone's May seasonally adjusted trade balance was 16.2 billion euros, with an earlier Reuters poll expecting 13 billion euros.