Euro zone government bond yields pull back after US data

By Stefano Rebaudo

Feb 13 (Reuters) - Euro area benchmark Bund yields were lower on Friday after U.S. consumer prices rose less than expected in January, though U.S. underlying inflation firmed as businesses raised prices at the start of the ?year.

Combined with a stabilising labour market, this could ?allow the Federal Reserve to hold rates steady for now, although odds of a June rate cut increased slightly.

Euro ?zone borrowing costs held at their multi-month lows before the U.S. inflation figures, with ?traders arguing that markets have been tracking U.S. Treasuries, even ?if the European Central ?Bank is expected to keep policy on hold this year.

Some economists argue that the deflationary impact of ?a strong euro could muddy the ECB's "good place" ?and prompt the central bank to ease monetary policy.

Bets on ECB rate cuts have shifted, with markets now indicating a less than 50% ?probability of a first move in December ?rather than ?September, after President Christine Lagarde last week played down the impact of dollar moves on future policy decisions.

Money market bets on an ECB rate cut by ?December picked up following the U.S. data, rising to 40% from around ?30% earlier in the day.

Germany's 10-year government bond yield, the euro area's benchmark, dropped 2.8 basis points to 2.749%, after hitting 2.738%, its lowest since December 3. It was on track for an around 10-bps weekly fall, the biggest since end-March.

U.S. Treasury yields ?fell, with ?the policy-sensitive 2-year paper down 5 bps at 3.42%.

Germany's two-year ?yield was down one bp at 2.02%.

Jamie Searle, European rate strategist at Citi, said ?that looking further ahead, European fiscal policy, defence spending and issuance are likely to remain key themes throughout 2026.

Investors will be watching the Munich Security Conference, taking place this weekend, for signals on whether EU leaders are prepared to take meaningful steps to bolster Europe's economic outlook and accelerate defence spending.

Italy's 10-year government bond yields were down 2.3 bps at 3.37%. The gap ?versus Bunds was about 59 bps after falling to 53.50 bps in mid-January, its lowest since August 2008.

Analysts mentioned progress on European financial integration as a key factor for further ?tightening in euro area yield spreads. (reporting ?by Stefano Rebaudo; Additional reporting by Sophie Kiderlin; editing by ?Mark Heinrich and David Holmes)