June 12 (Reuters) - Euro zone government bond yields

dropped on Wednesday as investors' focus shifted to the release

of key U.S. inflation data and the outcome of the Federal

Reserve policy meeting later in the session.

French and Southern European borrowing costs had risen to

their highest levels in around seven months on Tuesday on fears

that gains by eurosceptics in European Parliament elections and

the announcement of a snap vote in France could complicate

European Union attempts to deepen integration.

Germany's 10-year yield, the benchmark for the

euro area, was down 2 basis points (bps) at 2.60% on Wednesday.

It hit 2.707% at the end of May, its highest level since

mid-November.

The spread between French and German bonds, a

gauge of the risk premium investors seek to hold French bonds,

tightened slightly to 61 bps after hitting 66.9 the day before,

its widest since March 2023.

Money markets priced in around 40 bps of ECB further

monetary easing in 2024, which implies one

rate cut an around 60% chance of a third move by year-end.

Germany's 2-year government bond yield, more

sensitive to policy rate expectations, was up 0.5 bps at 3.01%.

It recently hit 3.125%, its highest since mid-November.

Italy's 10-year yield fell 3 bps to 4.03%.

The yield gap between Italian and German bonds

, a gauge of the risk premium investors seek to

hold bonds of the euro area's most indebted countries, tightened

2.5 bps to 142.50 bps. It hit 150.6 bps the day before, its

widest since February.

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