(Bloomberg) -- German bonds and their euro-area peers surged as investors scooped up the region’s debt after inflation in one German state fell in June for the first time since the start of the year, indicating a lower-than-forecast national figure.

Benchmark 10-year borrowing costs slumped by as much as eight basis points to 1.55%, while their Italian counterparts slid 12 basis points, narrowing the premium between the pair -- seen as an important gauge of risk -- by five basis points.

“Markets have been completely caught on the wrong foot,” said Michael Leister, head of rates strategy at Commerzbank AG, in a client note. “This suggests that already a small miss in the upcoming euro-area HICP would shift duration sentiment for real with the ECB moderates probably also getting second thoughts ahead of the upcoming meeting.”

German State Inflation Signals Below-Forecast National Reading

Euro inflation figures for June due on Friday are expected to rise to a fresh record high according to a median poll of investors surveyed by Bloomberg. Money markets shaved wagers on the pace of European Central Bank tightening, betting on 154 basis points of rate hikes this year compared to 164 basis points on Tuesday. 

Investors will be glued to the ECB’s central-banking conference in Sintra, Portugal for clues on the outlook for monetary policy with President Christine Lagarde, Federal Reserve Chair Jerome Powell and Bank of England governor Andrew Bailey participate in a panel discussion later Wednesday.  

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