LONDON: German yields fell to a 10-day low on Friday, with this week's weaker-than-expected data and Britain's upcoming EU referendum seen diminishing the chances of an interest rate rise in the United States next month.
Bund yields, which touched a one-month high just days ago, fell in line with their US equivalents, extending a decline that started on Thursday after data on US business spending plans failed to live up to expectations.
The data was swiftly followed by comments from a senior Fed policymaker that uncertainty surrounding Britain's June 23 referendum on whether to leave the European Union was an argument in favour of the Fed exercising "caution" as it ponders whether to raise rates at its June 14-15 policy meeting.
Market expectations for a hike in June, as measured by Fed Fund futures prices, fell to 26 percent on Friday from 34 percent early on Thursday, according to CME'S FedWatch.
Investor attention now turns to consumer sentiment data due later on Friday and a speech from Fed Chair Janet Yellen scheduled for just after European markets close in which some expect her to take quite a dovish tone.
"The market is teeing up for her to slightly rein in expectations (for a hike next month)," Rabobank strategist Lyn Graham-Taylor said.
German 10-year yields fell 2 basis points to a 10-day low of 0.127 percent on Friday, moving further away from a one-month high of 0.20 percent struck early on Wednesday. US equivalents fell 3 basis points overnight to close at 1.83 percent.
Most other euro zone bond yields were flat to slightly lower on Friday.
The decline in yields also came as crude futures retreated from $50 a barrel. Oil pricces are closely correlated to bond yields because of their impact on inflation, pinned now near zero in the euro zone.
Aside from Yellen's speech, one of the main events in investors' diaries is a final reading of the University of Michigan's consumer sentiment index for May. Economists polled by Reuters are expecting a slight decline from the flash reading of 95.8.
Commerzbank analysts said investors would be keeping a close watch on the numbers "given the Fed's data dependency".
If the Fed passes up on a June hike, there is more than a 50-percent chance that it raises rates at its next policy meeting on July 26-27, according to CME's FedWatch.
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