July 15 (Reuters) - Euro zone government bond yields

dropped on Tuesday, partly reversing recent gains, as investors

await U.S. inflation data later in the session which could

provide clues about the Federal Reserve's interest rate policy

path.

The U.S. figures will show how tariffs affected inflation in

June after data from previous months came in cooler than

economists had forecast.

German 10-year yields, the euro area's

benchmark, fell 4.5 basis points (bps) to 2.69%, after hitting

2.737% on Monday, the highest since March 28.

"U.S. June consumer price inflation is the first number that

might show trade tax effects," said Paul Donovan, chief

economist at UBS Global Wealth Management, adding that half the

expected tariff increases have hit the economy so far and

pre-tariff inventory is still available after recent

stockpiling.

Many importers recently boosted orders on expectations of

higher U.S. tariffs and prices.

The 30-year yield was down 5 bps at 3.21%, after

reaching 3.26% on Monday, its highest level since October 2023.

The two-year - more sensitive to expectations for European

Central Bank policy rates - fell 2.5 bps to 1.85%.

The German yield curve flattened slightly, with the spread

between 10-year and two-year yields down 1.5 bps at

83.50 bps. It climbed 6.1 bps the day before, in its biggest

daily rise since April 7 after a jump in Japanese yields.

The curve steepens when long-dated yields increase more

quickly than the short-dated ones.

Markets have priced in an ECB terminal rate roughly

unchanged at around 1.75-1.80%, while

yields on longer maturities have risen amid expectations of a

significant increase in German fiscal spending.

French 10-year yields fell 5 bps to 3.38%, with

the gap between French and German yields, a market

gauge of the risk premium investors demand to hold French debt,

at 70 bps.

Investors are focusing on the approval of the budget, after

French Prime Minister Francois Bayrou survived his latest

no-confidence motion in parliament early this month.

"The most likely path seems a gradual dilution of saving

measures with the final budget potentially targeting a deficit

of around 5% of GDP and with further slippage during the year,"

said Aman Bansal, director of European rate strategy at Citi.

Citi targets an OAT-Bund spread of 75 bps in 2025, aligning

with its BTP-Bund spread target, and says the OAT-BTP spread

will likely turn positive next year.

Citi sees a yield gap between OATs and Bunds at 60 bps if

the government succeeds in getting the budget approved.

Italy's 10-year government bond yields were down

4.5 bps at 3.57%, with the spread between BTPs and Bund yields

at 88 bps. It hit 84.20 bps earlier this month, its lowest level

since March 2015.