Euro zone bond yields ease as German business sentiment, US yields slip

Sept 24 (Reuters) - Euro zone bond yields were modestly lower on Wednesday after data showed German business sentiment unexpectedly declined in September, while U.S. bond yields drifted lower too, as investors pondered the future outlook for policy rates.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone, was down nearly 2 basis points at 2.733%.

Companies in Germany were less satisfied with their current business and expectations also darkened noticeably with Ifo institute's business climate index easing to 87.7 in September from a revised 88.9 in August, data released on Wednesday showed.

Other regional bond yields, such as those for France and Italy, were trading in line with German debt, with yields on longer-tenor debt drifting lower as well. Germany's 30-year bond yield DE30YT=RR dipped about 2 bps to 3.327%.

U.S. 10-year US10YT=RR and 30-year Treasury yields US30YT=RR, meanwhile, dipped to 4.102% and 4.714%, respectively.

European defence stocks rose on Wednesday after U.S. President Donald Trump, in a rhetorical shift, said he believed Ukraine could retake all its land occupied by Russia, but bond and currency markets appeared to largely shrug at the remarks.

Markets have grown accustomed to fading risks emanating from areas like geopolitics and trade tariffs and instead seem to be focused on the policy easing the Fed is expected to deliver, said Chris Scicluna, head of economic research at Daiwa Capital Markets.

While softness in the German business survey data contributed to a dip in yields on the day, expectations of heavy sovereign debt issuance going forward is likely to support a drift higher in long-tenor yields, Scicluna said.

Analysts at Goldman Sachs pointed out in a note that volatility of longer-maturity euro area government debt, especially the 30-year point, remains somewhat elevated, likely reflecting the uncertainty in global longer-dated debt, as well as the timing and impact of Dutch pension reform.

The focus now is on regional debt auctions and the release of U.S. personal consumption expenditure price data on Friday. Italy is scheduled to sell 5-year and 10-year bonds worth up to 8.75 billion euros ($10.32 billion) later this week.

Meanwhile, investors will parse the U.S. inflation data for cues on the future path of the Fed's policy rates. In remarks on Tuesday, Fed Chair Jerome Powell said the central bank needed to continue balancing the competing risks of high inflation and a weakening job market.

Money markets are currently pricing in a 94% chance of a 25 basis point rate cut by the Fed next month, per CME's FedWatch tool.

($1 = 0.8482 euros)