*

German 10-year Bund yields track biggest daily fall since

June,

after rising for 10 days

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Cooler U.S. core inflation brings back bets on two Fed

cuts in

2025

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Italy's 10-year yields track biggest daily drop since May

(Updates to European afternoon trading)

By Greta Rosen Fondahn

Jan 15 (Reuters) - Euro area benchmark Bund yields fell

on Wednesday, breaking a 10-day rising streak, as core U.S.

consumer price inflation came in below expectations in December,

bringing back bets on two Federal Reserve interest rate cuts in

2025.

While U.S. consumer prices rose 2.9% in the 12 months

through December as expected, core inflation, which excludes

food and energy prices, was 3.2%, below the 3.3% consensus

forecast.

Germany's 10-year yield had dipped earlier in

the day, and extended the fall after the data. If sustained, it

would be its biggest daily fall since mid-June.

It was last down 9 basis points at 2.53%, around its lowest

since Jan. 9, after hitting a fresh seven-month high at 2.63%

earlier on Wednesday.

Strong economic data and fears that U.S. President-elect

Donald Trump's policies could boost inflation have driven yields

up on both sides of the Atlantic since early December.

But traders of interest-rate futures on Wednesday were

pricing close to even odds the Fed will cut rates twice by the

end of this year.

Before the report, interest-rate futures reflected bets on

only a single reduction this year.

The U.S. 10-year Treasury yield was down 12 bps

at 4.6694% after hitting 4.8090% on Tuesday, the highest level

since Nov. 1, 2023.

Pepperstone strategist Michael Brown said the core consumer

price index data pointed to "some degree of underlying price

pressures beginning to fade" but argued the Fed still remained

on course to hold rates steady at the January meeting.

"Taking a step back, the CPI figures don't add particularly

much to the broader discourse, instead, serving to reaffirm that

underlying price pressures remain relatively stubborn."

In Europe, money markets slightly added to their bets on

European Central Bank rate cuts this year by around 5 bps after

the U.S. data.

Markets still expect the ECB to cut rates by around 95

basis points in 2025.

Germany's 2-year bond yield, more sensitive

to ECB rate expectations, fell 7 bps to 2.249% after hitting a

fresh 2-1/2-month high at 2.323%.

Euro zone industrial production rose as expected in November

but the latest data was unlikely to signal any major turnaround

for a sector in its second year of recession.

Italy's 10-year government bond yield was down

15 bps at 3.681%, on track for its biggest daily fall since

mid-May, while the gap between Italian and German yields

narrowed to 115 bps.