Euro area government bond yields fall after US inflation data

(Updates after U.S. CPI data)

By Greta Rosen Fondahn and Stefano Rebaudo

Jan 15 (Reuters) - Euro area benchmark Bund yields fell on Wednesday, breaking a 10-day rising streak, as core U.S. consumer price inflation came in below expectations in December, bringing back bets on two Federal Reserve rate cuts in 2025.

While U.S. consumer prices rose 2.9% in the 12 months through December as expected, core inflation, which excludes food and energy prices, was 3.2%, below the 3.3% consensus forecast.

Germany's 10-year yield had dipped earlier in the day, and extended the fall after the data.

It was last down 8 basis points (bps) at 2.543%, after hitting a fresh seven-month high at 2.63% earlier on Wednesday.

Strong economic data and fears that U.S. President-elect Donald Trump's policies could boost inflation have driven yields up on both sides of the Atlantic since early December.

But traders of interest-rate futures were on Wednesday pricing close to even odds the Fed will cut interest rates twice by the end of this year.

U.S. 10-year Treasury yields were down 11 bps at 4.6694% after hitting 4.8090% on Tuesday, their highest level since Nov. 1, 2023.

Germany's 2-year bond yield, more sensitive to European Central Bank rate expectations, fell 7 bps to 2.248% after hitting a fresh 2-1/2-month high at 2.323%.

Euro zone industrial production rose as expected in November but the latest data was unlikely to signal any major turnaround for a sector in its second year of recession.

Italy's 10-year government bond yield was down 12 bps at 3.708%, while the gap between Italian and German yields narrowed to 115.9 bps. (Reporting by Greta Rosen Fondahn and Stefano Rebaudo; Editing by Bernadette Baum, Jacqueline Wong, Hugh Lawson and Tomasz Janowski)