Cooler European inflation sends German yields to one-month lows

(Updates prices with late trading, US data)

By Alun John

LONDON, Jan 7 (Reuters) - German 10-year bond yields dropped to their 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.

Tuesday's data helped set the tone, ?including numbers showing inflation slowed more than expected in some of the euro zone's biggest economies last month.

U.S. data later on ?Wednesday showed a measure of job openings fell more than expected in November, while private sector ?employment picked up more or less in line with expectations in December. ?This left U.S. interest ?rate expectations roughly unchanged.

Germany's 10-year yield was down 3 basis points at 2.817%, having hit its lowest since December 5 earlier.

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 has shifted the discussion ?onto the ?small chance of another rate cut, as opposed to late last year when traders were considering the slight prospect of a rate hike this year.

Still, this 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 2.087%.

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 2.7 bps at 3.53%, while Italy's was ?down 2 bps at 3.48%. (Reporting by Alun John. Editing by Toby Chopra, Mark Potter and Jane Merriman)