Euro zone benchmark yield hits three-month low, as oil price tumbles

(Updates to European afternoon)

By Alun John

LONDON, June 24 (Reuters) - German 10-year Bund yields hit a three-month low on Wednesday, as oil prices fell further, reinforcing investor views that euro zone inflation will remain broadly in check, limiting the amount of policy tightening needed by the European Central Bank. The euro zone benchmark fell 4 basis points to 2.87%, its lowest since March 11, and is down 11 bps this week. This week's rally has been helped by ECB President Christine Lagarde telling the European Parliament on Monday there was no evidence of the kind of inflation pick-up that would warrant more forceful policy action, and after soft inflation readings from business activity data on Tuesday.

Those reinforced the shift in market sentiment after last week's initial agreement between the U.S. and Iran. The deal allowed shipping to resume through the Strait of Hormuz, sending the price of Brent crude oil down, and reducing the likelihood energy will cause a rise in prices more broadly.

Oil fell again on Wednesday, with Brent down 4.4% to $73.7 a barrel, levels last seen at the start of the Iran war.

Markets are pricing in another increase of 25 bps by the ECB, which tightened policy earlier this month, by the end of the year, but they see little chance of a third move in 2026, a change from a few weeks ago.

RBC Capital Markets has removed a third rate hike this year from its forecasts, saying: "there has been a material change in the inflation environment".

"The key question now is to what extent there can be a fast mean-reversion in euro area inflation dynamics or whether a persistent element remains," RBC analysts said in a note.

They still expect the ECB to hike rates in September, but said they expected policymakers to use speeches between now and then to guide markets either towards or against that outcome.

ECB-sensitive short-dated yields moved less, with Germany's 2-year yield down 2 bps at 2.55%, but the 30-year yield was down 5 bps at 3.42%, its lowest since April 1. Also in the mix in Europe was data showing German business morale rose in June, with companies more positive about their situation than they have been for nearly two years.

Other euro zone bonds were moving broadly in line with Germany. Italy's 10-year yield dropped 5 bps to 3.60%, its lowest since March 13. (Reporting by Alun John; Editing by David Goodman, Ros Russell and Alexander Smith)