Euro zone government bond yields drop slightly after US data

Sept 26 (Reuters) - Euro zone government bond yields were little changed after U.S. data showed U.S. consumer spending increased slightly more than expected in August.

U.S. consumer spending, which accounts for more than two-thirds of economic activity, rose 0.6% last month after an unrevised 0.5% advance in July, the Commerce Department's Bureau of Economic Analysis said on Friday.

Germany’s 10-year Bund yields, the bloc’s benchmark, dropped 4 basis points (bps) to 2.73%. It was falling by 3 bps right before the U.S. data.

Traders had already been expecting a benign inflation reading.

U.S. Treasuries have taken the lead in the euro area’s fixed income market this week, with investors uncertain about the Federal Reserve’s easing path while expecting the European Central Bank to keep rates steady through early 2027.

Thursday’s U.S. economic data have cast doubt on market expectations for Fed policy, prompting traders to scale back bets on future rate cuts to 100 bps by the end of 2026, while pricing in an 80% chance of an easing move next month.

Traders priced in an around 40% chance of an ECB 25 bps rate cut by July EURESTECBM7X8=ICAP. The key rate is seen at 1.97% in December 2026 from the current 2%. EURESTECBM11X12=ICAP

U.S. Treasuries were slightly lower with Benchmark 10-year yield US10YT=RR down one bp at 4.16%.

Germany’s 2-year yields DE2YT=RR, more sensitive to expectations for ECB policy rates, fell 2 bps to 2.02%.