Euro zone government bond yields edge down before inflation data

By Stefano Rebaudo

Sept 30 (Reuters) - Euro zone yields edged lower on Tuesday ahead of inflation data from Germany, France and Italy, which analysts see as unlikely to alter expectations that the European Central Bank will keep interest rates near current levels through early 2027.

U.S. Treasuries have taken the lead recently as the euro area's fixed income markets struggled for direction.

Germany's 10-year Bund yield, the bloc's benchmark, was down 0.5 basis points (bps) at 2.70%.

German import prices decreased by 1.5% year-on-year in August, the statistics office said on Tuesday.

U.S. Treasuries were roughly unchanged in early London trade with the 10-year yield flat at 4.14%, after dropping on Monday as investors adjusted for the risk of a U.S. government shutdown later this week.

Traders priced in an about 35% chance of a 25 bps ECB rate cut by July 2026. The key rate is seen at 1.98% in February 2027 from the current 2%.

Germany's 2-year yield, more sensitive to expectations for European Central Bank policy rates, dropped 0.5 bps to 2.02%.

The yield gap between safe-haven Bunds and 10-year French government bonds - a market gauge of the risk premium investors demand to hold French debt - was at 82 bps.

New French Prime Minister Sebastien Lecornu said he aimed for a budget deficit of around 4.7% of GDP in 2026, not much changed from previous prime minister Francois Bayrou's target of 4.6%, from a forecast 5.4% this year. (reporting by Stefano Rebaudo; editing by Ros Russell)