Euro zone bond yields dip as inflation eases before ECB

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Euro zone inflation drops to lowest since September 2024

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ECB expected to keep rates unchanged despite inflation drop

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German 10-year yield down 2 bps

(Updates after EZ inflation data, adds quotes)

By Samuel Indyk

LONDON, Feb 4 (Reuters) - Euro zone government bond yields inched lower on Wednesday after bloc-wide inflation data showed an easing of price pressures in January, although ?it was not expected to stop the European Central Bank from keeping interest rates unchanged this week.

Germany's 10-year Bund yield, which serves ?as a benchmark for the wider euro zone debt market, was down almost 2 basis points ?at 2.871%, having risen by nearly 7 basis points in the prior ?three days, as have ?30-year yields.

Long-dated bond prices were a touch firmer, leaving the 30-year yield down 1.5 bps at 3.531%, only marginally below Tuesday's peak ?of 3.559%, the highest since 2011.

HEADLINE INFLATION EASES

Euro ?zone price growth slipped to its lowest level since September 2024, dropping to 1.7% in January, data showed on Wednesday. The reading was in line with ?economists' forecasts. Core inflation, which strips out volatile items ?such as energy, ?food, alcohol and tobacco, unexpectedly edged down to 2.2%, its lowest level since October 2021.

"The ECB will try to look through the noise coming from energy, from the euro ?strength. That was a big part of the downside surprise to headline inflation," said Anders Svendsen, chief analyst at Nordea.

"They will be happy with the core side. They have inflation under control," he added.

The ECB is set to announce policy on Thursday and is likely to keep its deposit rate on hold at 2% for the fifth straight meeting, while ECB chief Christine Lagarde should ?reiterate that the ?central bank is in a "good place".

Money market traders expect the ECB to keep policy rates on hold through 2026 as inflation is near the central bank's 2% target ?and growth remains resilient.

Germany's 2-year yield, which is sensitive to changes in ECB policy expectations, was down 1 bp at 2.088%.

SPREADS TIGHTER

Ten-year bond yields in Italy, France and Spain were also falling slightly on Wednesday, keeping the gap between their respective yields and Germany's at historically tight levels.

"People had been talking about this massive increase in bond issuance that we are going to see this year, but so far that issuance has been really ?well absorbed," said Nordea's Svendsen. "That's why we have seen spreads come in."

The French-German 10-year yield spread was last at 57.6 bps, close to its tightest level since June 2024, having tightened aggressively since the French government said it would use constitutional ?powers to push through a budget for 2026.

(Reporting by Amanda Cooper and Samuel Indyk; Editing by Alex Richardson)