Euro zone bond yields dip after U.S. PCE inflation cools

LONDON, Feb 29 (Reuters) -

Euro zone government bond yields fell on Thursday after data showed U.S. inflation cooled in January, bolstering investors' hopes that central banks will cut interest rates relatively sharply this year.

Germany's 10-year yield, the euro area's benchmark, was last down 2 basis points (bps) at 2.445%, having traded 4 bps higher at 2.497% before the U.S. data.

The benchmark yield earlier touched 2.513%, its highest level since Nov. 28, after data showed month-on-month regional German inflation remained relatively strong in February.

Data on Thursday

showed that year-on-year U.S. personal consumption expenditures index inflation (PCE) came in at 2.4% in January, compared with 2.6% in December. Investors watch the PCE figure closely as it is the Federal Reserve's preferred gauge of price pressures.

Month-on-month, inflation ticked up slightly to 0.3% from 0.1%, in line with economists' expectations.

After the data, Germany's two-year yield, which is sensitive to changes in interest rate expectations, was down very slightly at 2.922%. It had traded around 4 bps higher at 2.965% previously.

"Ultimately the report was largely in line with economist estimates, which was seen a relief for investors who were concerned about the potential for hotter than expected inflation to start the year," Sam Millette, director of fixed income for U.S.-based Commonwealth Financial Network, said.

U.S. 10-year bond yields also fell and were last down around 2 bps.

French numbers released earlier in the day showed inflation slowed slightly less than expected, to 3.1%, in February, down from 3.4% the month before. Spanish data showed EU-harmonised inflation falling to 2.9%, in line with expectations.

The euro-zone wide figure for February will be released on Friday.

"Inflation is still a little bit higher than everybody would have expected a few months ago," said Anders Svendsen, chief analyst at Nordea.

"If you look at the January numbers, the monthly increases were quite high and if that's the case again in February it will challenge the narrative of gradually falling inflation."

Italy's 10-year yield, the benchmark for the euro zone's more indebted countries, was last down 2 bps at 3.88%. (Reporting by Harry Robertson and Samuel Indyk Editing by Keith Weir, Christina Fincher and Andrew Heavens)