Euro zone government bond yields were steady on Wednesday ahead of pivotal U.S. inflation data due later in the session which could provide an indication on how soon the Federal Reserve will pause its rate hiking cycle.
Investors were also awaiting the minutes from the Fed's most recent meeting, due at 1800 GMT, which could indicate how recent turmoil in the financial system will impact the path for monetary policy.
Germany's 10-year government bond yield, the euro zone's benchmark, was little changed at 2.303%.
Germany's two-year yield, which is sensitive to changes in interest rate expectations, was up 2.5 basis points (bps) at 2.73%.
Analysts were focusing on the U.S. consumer price index for March, with headline inflation expected to rise 0.2% on a month-over-month basis, down from 0.4% in February. Core CPI is expected to slow to 0.4% from 0.5% previously, although this would still push the annual core rate higher to 5.6%.
"The central banks are data dependent so if that number surprises on either side you could see a reaction in the market, starting in the U.S. but spilling into Europe," said Jens Peter Sørensen, chief analyst at Danske Bank.
"Lower than expected inflation will get a rally. If you get higher than expected inflation data you'll see a sell off as markets will see the Fed as needing to hike by more," Sørensen added.
Bond yields move inversely with prices.
Markets price in around a 75% chance that the Fed will raise interest rates by 25 basis points at its May meeting and around a 25% chance it will keep rates unchanged. Markets also price in around 40 basis points of rate cuts by year end.
Expectations for policy easing from the Fed increased after the collapse of Silicon Valley Bank in March, causing Treasury yields to tumble, and the minutes from the Fed's March meeting will be keenly eyed for clues on the effect of March's banking worries on policy.
"The minutes will to some extent acknowledge the banking troubles, but on the other hand they will also say they need to get inflation down," Danske Bank's Sørensen said.
The European Central Bank, meanwhile, is expected to push on with rate hikes to get inflation back under control.
ECB policymaker Francois Villeroy de Galhau said late on Tuesday that the central bank would keep fighting excessive price growth, even as its policy response is shifting gears.
Markets price in almost 75 basis points of further tightening from the European Central Bank (ECB) by the end of the year, the equivalent of three 25 basis point hikes, although traders see the central bank downshifting to a smaller 25 basis point hike next month.
Italy's 10-year government bond yield was flat at 4.163%, keeping the closely-watched yield gap between Italian and German 10-year debt steady at around 185 bps.
On the supply front, Germany is set to sell up to 2.5 billion euros of longer-dated bonds, while the UK is set to sell 16-year index-linked debt.
(Reporting by Samuel Indyk- Editing by Raissa Kasolowsky)