(Updates to early afternoon in Europe)

By Alun John

LONDON, June 24 (Reuters) - The 10-year German Bund yield

hit a three-month low on Wednesday on the back of this week's

shift by investors to thinking euro zone inflation will remain

broadly in check, limiting the amount of policy tightening

needed by the European Central Bank.

The euro zone benchmark fell as low as 2.899%, its lowest

since March 18, and was last a whisker above that level, down

around 1 basis point on the day.

It has fallen 8 basis points (bps) this week after ECB

President Christine Lagarde told the European Parliament on

Monday there was no evidence of the kind of pick-up in inflation

that would warrant more forceful policy action, and after soft

inflation readings from business activity data on Tuesday.

Those reinforced the shift in market sentiment that followed

last week's initial agreement between the U.S. and Iran. The

deal allowed shipping to resume through the Strait of Hormuz,

sending the price of Brent crude oil down to near $75 a barrel,

and reducing the likelihood energy will cause a rise in prices

more broadly.

All else being equal, that should mean fewer interest rate

hikes by the ECB, which tightened policy earlier this month.

Markets are pricing in another increase of 25 bps by the end

of the year, but they see little chance of a third move in 2026,

a change from a few weeks ago.

Analysts at RBC Capital Markets have removed a third rate

hike this year from their forecasts, saying in a note that

"there has been a material change in the inflation environment."

"The key question now is to what extent there can be a fast

mean-reversion in euro area inflation dynamics or whether a

persistent element remains."

They still expect the ECB to hike rates in September "to

keep its inflation-fighting credibility intact", but said they

expected policymakers to use speeches between now and then to

guide markets either towards or against that outcome.

ECB-sensitive short dated yields were steady on Wednesday

with Germany's 2-year yield flat at 2.91%, but yields on very

long dated debt fell. Germany's 30-year yield was down 2 bps at

3.45%, its lowest since mid April.

Also in the mix in Europe was Wednesday data showing German

business morale rose in June, with companies more positive about

their current situation than they have been for nearly two

years.

In contrast to the ECB, traders have been turning more

hawkish on the U.S. Federal Reserve, sending Treasury yields

higher. The U.S. 10-year yield was last at 4.48%, putting it

about 157 bps above its German equivalent, the most since August

2025.