Euro zone bond yields slightly lower; inflation, rate outlook in focus

By Sophie Kiderlin

LONDON, Oct 14 (Reuters) - Euro zone bond yields were slightly lower on Wednesday, continuing to stabilise after a period of sharp volatility, as investors tread cautiously ahead of US inflation data due later in the day.

Investors are hoping to glean clues about the possible interest rate path ahead for the Federal Reserve from the data. Economists are expecting that headline inflation accelerated to an annual 3.6% in September due to rebounding energy prices.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone, was down by less than a basis point at 3.4589%.

Bonds have been tentatively stabilising and volatility has been easing in recent days, but market participants remain on edge following a global rout in late September and early October. Worries about higher energy prices, rates and inflation sent yields higher, with fiscal concerns adding to the storm for more indebted countries.

Germany's 2-year bond yield, which is more sensitive to interest rate expectations, fell almost 2 basis points (bps) to 3.1036%.

Speaking at a CNN event in Bangkok, European Central Bank President Christine Lagarde said the current high rate of inflation in the euro zone had been driven "predominantly, but not exclusively" by a surge in energy prices caused by the US-Israeli war on Iran.

While there was no sign yet of "second-round effects" on other prices, the ECB would be looking for "hints," such as trade unions' demands in wage negotiations.

The ECB has raised interest rates twice this year, by 25 bps each time, and money markets were last close to fully pricing in another hike by the December meeting.

(Reporting by Sophie Kiderlin; Editing by Thomas Derpinghaus)

((sophie.kiderlin@thomsonreuters.com))