LONDON- Euro zone government bonds were steady on Thursday, as markets continued to digest an easing of inflationary pressures in the United States, with Germany's benchmark Bund just below a two-week high.
Increases in U.S. consumer prices slowed in July, CPI data showed on Wednesday, taking some heat out of speculation over when the Federal Reserve might taper its bond buying.
The news saw the spread between U.S. and German 10-year yields narrow as Treasury yields fell. But by 1215 GMT on Thursday, the moves had largely reversed and the spread was at 181.23, close to its highest since June.
Antoine Bouvet, senior rates strategist at ING, said that the European government bond market was being driven more by data releases in the United States - acting "as a Beta to Treasuries". A lack of euro-centric news was limiting volatility, he added.
"The rise (in yields) that I’m expecting reaching into the year is in fact more likely to be driven by U.S. considerations – the fact that the Fed is going to taper."
Germany's 10-year yield was up by half a basis point at -0.454% while Italy's 10-year yield was down by one basis point at 0.5576%.
The closely-watched gap between Italian and German 10-year yields was at 100.68 bps, having briefly narrowed below 100 bps for the first time in a month on Wednesday.
"With the data/supply calendar cooling down, markets should remain in consolidation mode. We recommend buying dips," Commerzbank rates strategists wrote in a note to clients.
A gauge of long-term euro zone inflation expectations - the five-year, five-year inflation forward - rose to 1.7178%, its highest since August 2018.
"The market's now expecting that the ECB will let inflation run a bit further than it would normally have," ING's Bouvet said.
U.S. yields were pushed higher earlier in the week by comments from Federal Reserve officials suggesting that the central bank could soon reduce its asset purchases.
Market participants were waiting for U.S. producer-price inflation data (PPI) and jobless claims later in the session.
(Reporting by Elizabeth Howcroft; Editing by Kirsten Donovan and Pravin Char) ((Elizabeth.Howcroft@thomsonreuters.com; +44 02075427104;))