Euro zone bond yields mixed as strong U.S. data offsets soft German inflation

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U.S. data boosts Treasury yields

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German inflation eases in August

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Euro zone inflation data due on Friday

(Updated at 1454 GMT)

By Sruthi Shankar and Alun John

LONDON, Aug 29 (Reuters) - Euro zone bond yields were mixed on Thursday as stronger-than-expected U.S. growth data supported Treasury yields and offset the impact of soft German inflation data on the bloc's bond markets.

The German 10-year bond yield edged up 2.6 basis points to 2.28% by early evening in London, having fallen to as low as 2.22% earlier in the session.

U.S. bond yields rose across the board after data showed the U.S. economy grew faster than initially thought in the second quarter amid strong consumer spending. Gross domestic product increased at a 3.0% annualised rate last quarter against forecasts for 2.8% growth.

Another set showed the number of Americans filing new applications for jobless benefits slipped last week.

"The claims data, GDP revision and trade deficit tell a single story: Demand is strong for both goods and labor," said David Russell, global head of market strategy at TradeStation.

"While it's encouraging to see less evidence of a recession, today's numbers potentially argue against the idea of continuous rate cuts by the Fed."

Stock markets in Europe and the U.S. were trading near all-time highs after the data, despite disappointing earnings from AI darling Nvidia (NVDA).

Germany's interest rate-sensitive two-year yield continued to remain lower, down 1.4 bps at 2.365%. It had dropped to as low as 2.326%.

The decline followed the release of data which showed German inflation fell more than expected in August, easing to its lowest level in more than three years and making it easier for the European Central Bank to cut rates in September.

Inflation eased to 2.0% in August, thanks to lower energy prices. Economists polled by Reuters had forecast a reading of 2.3%.

Reinforcing expectations of a currency bloc-wide decline, separate data showed Spanish inflation fell to 2.4% year-on-year in August, when adjusted to compare across the European Union, down from 2.9% in July.

The numbers come ahead of the euro zone inflation release on Friday.

Markets slightly upped their expectations for ECB rate cuts this year and now price around 64 bps of cuts by year end. In practice that indicates a 25 bp cut at their meeting in September and another cut either in October or December, or possibly both.

For some analysts this reaction is too much however.

"Despite the good numbers that we see on inflation in Germany, core inflation remained elevated in the second quarter of the year and that will not enable the ECB to deliver three rate cuts this year," said Althea Spinozzi, head of fixed income strategy at Saxo Bank.

Italian yields also reacted to the German data. Italy's 10-year yield was last down 2.1 bps at 3.67%, and the gap between Italian and German bond yields narrowed to 137 bps.

Also in the mix, Italy's cost of funding edged down at an auction on Thursday, at which it sold the top planned amount of 9.25 billion euros ($10.25 billion) over three bonds. (Reporting by Harry Robertson, Sruthi Shankar and Alun John; Editing by Muralikumar Anantharaman, Jan Harvey and Jonathan Oatis)