Cooler European inflation sends Germany's 10-year yield to one-month low

(Updates with morning trading)

By Alun John

LONDON, Jan 7 (Reuters) - Germany's 10-year bond yield dropped to its lowest in a month on Wednesday, helped by lower oil prices a day after cooler inflation in key European economies suggested the European Central Bank need not rush to raise rates.

There is a raft of U.S. economic data to ?come later in the day - services activity data as well as private payrolls and job openings - that could affect Federal Reserve expectations, ?move U.S. Treasuries and spill over into euro zone government bonds.

But until then, it was Tuesday's ?data that was shaping the picture, particularly numbers showing inflation slowed more ?than expected in some ?of the euro zone's biggest economies last month.

Germany's 10-year yield was down 4 basis points at 2.80% and hit its lowest since ?December 5.

Data on Wednesday showed euro zone-wide inflation ?also slowed and hit the ECB's 2% target, but that was largely expected after Tuesday's national figures.

Investors expect the ECB to keep its policy rate steady throughout ?this year, but the recent data means the ?discussion is now ?about the small chance that it might cut rates again, as opposed to late last year when traders were considering a small chance of a rate hike this year.

Still, ?the move was not sufficient to have a significant effect on shorter-dated bond yields, which are sensitive to near-term rate expectations. Germany's two-year yield was down just over 1 bp at 2.08%.

Lower oil prices on Wednesday reinforced the narrative around cooling inflation.

Kenneth Broux, head of corporate research FX and rates at Societe Generale, said it was notable that bonds were once again reacting to inflation ?data and ?oil prices.

He said these had "been entirely sidelined as a driver of (longer-dated bonds) in recent weeks and supplanted by the term premium, the ECB outlook and Dutch pension ?fund transition."

"The last 24 hours or so mark a first change in tactics and whilst new highs in yield terms cannot be ruled out down the line, the tactical switchback cannot be ignored," he said.

The Dutch occupational pension system, the European Union's largest, will start transitioning to a new system from January 1, a move that could add to pressure on long-term government bonds.

The term premium is the extra interest rate investors ?demand for holding longer-dated debt over shorter-dated, and rose last year in nearly all developed bond markets.

Other euro zone bonds were largely moving in line with Germany's, the euro zone benchmark. France's 10-year yield was down nearly 5 bps at 3.51%, ?while Italy's was down 4 bps at 3.45%. (Reporting by Alun John. Editing by Toby Chopra and Mark Potter)