Euro zone government bond yields fell on Wednesday with investors holding back ahead of the release of U.S. inflation data later in the session and Thursday's interest rate decision from the European Central Bank.

In Tuesday night's presidential debate, Kamala Harris put rival Donald Trump on the defensive, fuelling expectations for a decline in U.S. interest rates. Investors expect trade tariffs and higher spending that would boost rates if Trump wins.

U.S. benchmark 10-year yields hit a fresh 15-month low of 3.60%, down 4 basis points (bps). Bond yields move inversely to prices.

For Bunds, the effect of a Trump victory is more ambiguous, some analysts argued. Trade tariffs would have an inflationary impact but also drag on the economy, lowering rates. Heightened geopolitical tensions would also weigh on global yields.

Germany's 10-year yield, the benchmark for the euro zone bloc, was down 3.5 basis points (bps) at 2.11%, a fresh one-month low.

The focus remained on the U.S. on Wednesday, with the August consumer price index (CPI) released later in the session.

While the Federal Reserve's focus has shifted towards the labour market, these figures could still be pivotal to sizing the first Fed cut next week after the jobs report failed to settle the debate.

Citi analysts said a downside surprise to the consumer price index (CPI), with the core at 0.1%, could raise market-implied probabilities for a 50 bps cut in September.

They expect a 0.204% month-on-month increase, which would lead Fed officials to use activity data like initial jobless claims and retail sales for guidance on the appropriate size of the first easing.

Money markets fully priced a 25 bps cut by the Fed and a 33% chance of a 50 bps move this month.

They also discounted around 60 bps of ECB rate cuts in 2024 , implying two 25 bps moves and a 40% chance of a third cut.

Investors expect the ECB to reduce policy rates by 25 bps on Thursday, with President Christine Lagarde stressing the central bank will remain data-dependent.

Germany's two-year bond yield, more sensitive to changes in ECB rate expectations, dropped 4.5 bps to 2.15%, after hitting 2.144%, a fresh 18-month low.

Italy's 10-year yield was lower by 5 bps at 3.50%, after reaching 3.47%, its lowest since December 2023.

The gap between Italian and German Bunds -- a gauge of the risk premium investors demand to hold Italian government bonds -- stood at 137 bps.

Italy's new extra-long bond launched on Tuesday attracted record demand as the country's bond yields remain attractive ahead of an anticipated interest rate cut from the ECB.

(Reporting by Stefano Rebaudo, editing by Ros Russell)