Euro zone government bond yields dropped on Friday after inflation data from France and Spain, with investors awaiting figures from the US, which could affect expectations for monetary policy paths on both sides of the Atlantic.

French consumer prices rose less than anticipated in September, aided by a decline in energy costs.

Spain’s European Union-harmonised 12-month inflation fell to 1.7%, lower than the 1.9% expected by analysts polled by Reuters.

The German and euro area inflation figures are due next week. Markets will closely watch the US Personal Consumption Expenditure (PCE) figures, the Federal Reserve’s preferred inflation measure, later in the session.

Germany’s 10-year bond yield, the benchmark for the euro zone bloc, fell 3.5 basis points (bps) to 2.14%.

Markets priced in more than a 70% chance of a 25 bps rate cut by the European Central Bank in October from around 20% early this week and 60% before data.

Germany’s two-year bond yield, which is sensitive to ECB rate expectations, was down 3 bps at 2.08%.

Euro zone bond yields hold steady after two-day slide

It hit 2.079% on Thursday, its lowest level since December 2022.

The gap between French and German 10-year yields - a gauge of risk premium that investors demand to hold France’s government bonds - was last at 79 bps, from around 70 bps two weeks ago.

It reached its widest since 2012 beyond 85 bps during France’s parliamentary elections.

Budget Minister Laurent Saint-Martin warned the deficit is at risk of topping 6% of economic output, far above the 5.1% the previous government had estimated in the spring.

Italy’s 10-year yield fell 4 bps to 3.44% and the gap between Italian and German yields tightened to 128 bps.