Germany's 10-year government bond yield , the bloc's benchmark, was down 9 basis points (bps) at 2.174%. Its 2-year bond yield , the most sensitive to expectations for policy rates, was down 12 bps at 2.509%.
The U.S. two-year Treasury yield was down 14 bps at 3.695%.
Euro area borrowing costs were flat before the U.S. numbers amid mixed signals about the monetary tightening path from economic data and central banks' officials. ECB governing council member Gabriel Makhlouf on Tuesday argued that the euro area would need a stronger monetary policy response if it ends up in a wage-price spiral.
German industrial orders rose more than expected in February, increasing by 4.8% from the previous month. Federal Reserve Bank of Cleveland President Loretta Mester said on Tuesday, after the release of weak jobs data, the U.S. central bank likely has more interest rate rises ahead amid signs the recent banking sector troubles have been contained.
Market expectations for the ECB terminal rate slipped, with the September 2023 ECB euro short-term rate (ESTR) forward at 3.35%, implying an ECB deposit facility rate at 3.45% by summer.
The November 2023 forward peaked at around 4% before fears of a banking crisis hit markets in mid-March.
But analysts still expect the ECB to push on with its monetary tightening, even as price pressures show signs of easing.
"Lower inflationary pressures may not be enough to content the ECB," said Antoine Gaveau, European rate strategist at Citi, who pointed to recent ECB officials' comments "keeping the door to a 50bp hike in May open." Data on Tuesday showed euro zone producer prices fell more than expected, while consumers cut their inflation expectations. Markets see an 85% chance of a 25 bps rate hike in May, with around 15% chance of a larger 50 bps rate rise. Citi economists continue to see ECB hiking towards a peak of 4%, although now via 25 bps increases. Italy's 10-year government bond yield fell 9.5 bps to 4.031%, with the spread between Italian and German 10-year yields - a gauge of confidence in the euro zone's more indebted countries – at 184 bps. (Reporting by Stefano Rebaudo and Samuel Indyk, Editing by Conor Humphries)
