By Harry Robertson
LONDON, June 20 (Reuters) - Euro zone bond yields dipped on Tuesday as they pared some of Monday's solid rise and reacted to a bigger-than-expected fall in German producer prices.
Germany's 2-year bond yield, which is highly sensitive to interest rate expectations, was last 2 basis points (bps) lower at 3.187%.
The yield, which moves inversely to the price, rose 4 bps on Monday and hit a three-month high of 3.214% as trading began on Tuesday.
"This morning we have seen a bit of a recovery," said Christoph Rieger, head of rates research at Commerzbank. Rieger said bonds could be benefiting from a fall in stocks on Monday and Tuesday, as investors shift cash around.
Data on Tuesday showed that the prices German producers receive for their goods and services fell 1.4% in May compared to April, a much bigger drop than the 0.7% fall economists had expected.
Rieger said the figures were "probably adding a little bit to the momentum that we are seeing this morning".
He added: "It fits the picture that we're seeing a bit of a retracement. But is this the most important number? No."
Germany's 10-year bond yield, the benchmark for the euro zone, was last down 3 bps at 2.487%, after rising 5 bps the previous day.
The German data adds to signs that euro zone inflation is cooling, after figures released earlier this month showed that inflation in the 20 countries sharing the euro eased to 6.1% in May from 7% in April.
However, the inflation rate is still well above the European Central Bank's 2% target.
A raft of ECB officials spoke on Monday, but investors took most notice of the "hawkish" ECB board member Isabel Schnabel, who said it's better to "err on the side of doing too much rather than too little".
Italy's 10-year government bond yield was last down 5 bps at 4.082% on Tuesday, after climbing 9 bps the previous day.
The closely watched gap between Italian and German 10-year bond yields was little changed at 158 bps, after falling to its lowest since the start of April 2022 last week at 150 bps.
ECB officials including Vice President Luis de Guindos and Finnish central bank chief Olli Rehn are due to speak later on Tuesday.
Traders betting on where interest ECB interest rates are headed expected them to peak at above 3.9% on Tuesday, from a current level of 3.5%. Those expectations are up from around 3.75% a month ago.
Global investors also took note of China's decision to cut its key lending benchmarks on Tuesday for the first time in 10 months, in an effort to shore up a faltering economic recovery.