Euro zone bond yields dip as markets await US inflation data

Euro zone government bond yields were slightly lower on Wednesday, continuing to stabilise after a period of sharp volatility, as investors waited for US inflation data due later in the day for clues on the Federal Reserve's interest rate path.

Germany's 10-year bond yield, the benchmark for the euro zone, was down by less than a basis point at 3.4589%, according to the source. The 2-year yield, more sensitive to interest rate expectations, fell almost 2 basis points to 3.1036%. Economists expect US headline inflation to have accelerated to an annual 3.6% in September, the source said, driven by rebounding energy prices.

Bonds have been tentatively stabilising and volatility has eased in recent days, but market participants remain on edge following a global rout in late September and early October. Worries about higher energy prices, rates and inflation pushed yields higher, with fiscal concerns adding to pressure on more indebted countries.

Speaking at a CNN event in Bangkok, European Central Bank President Christine Lagarde said the current high rate of inflation in the euro zone had been driven "predominantly, but not exclusively" by a surge in energy prices caused by the US-Israeli war on Iran. She said there was no sign yet of "second-round effects" on other prices, but the ECB would look for "hints" such as trade unions' wage demands.

The ECB has raised interest rates twice this year, by 25 basis points each time, and money markets were last close to fully pricing in another hike by the December meeting, the source said.