Euro zone bond yields inch up as Fed tempers big rate cut bets

Reuters | Jun 26, 2019 at 7:57 AM

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr

LONDON, June 26 (Reuters) - Germany's 10-year bond yield nudged off record lows on Wednesday, after comments from U.S. Federal Reserve officials tempered the most aggressive U.S. rate cut bets.

Fed Chairman Jerome Powell and St. Louis Federal Reserve Bank President James Bullard on Tuesday pushed back on market expectations and presidential pressure for a significant U.S. interest rate cut of half a percentage point as soon as its next meeting.

A modest sell-off in U.S. Treasuries, spilled over into the euro zone but the rise in bond yields was tepid.

Analysts put that down to two reasons.

One, solid expectations that rate cuts from the European Central Bank and possibly other easing measures are coming soon. Two, demand for safe assets such as German bonds are high because of worries about geopolitical tensions in the Middle East and a protracted trade war.

"The German Bund yield was already at all-time lows, so there was no big reason to react to what happened overnight in the U.S.," said KBC rate strategist Mathias van der Jeugt.

"The ECB compass is back at easing and unless we get a dramatic pick-up in data we are stuck at current levels for some time."

In early European trade, most 10-year bond yields in the single currency bloc were 1-2 basis points higher on the day.

Germany's 10-year Bund yield rose 1.5 bps to minus 0.32%, edging off Tuesday's record low at minus 0.336%. Still, it is set to end the quarter down 25 basis points in its third straight quarter of declines.

The French 10-year bond yield briefly dipped to -0.004% .

In contrast, U.S. Treasury yields were 2-3 bps higher, with 10-year yields back above 2% following the Fed comments.

According to latest data from CME Group's FedWatch program, federal funds futures implied that traders saw a 27% chance of the Fed lowering rates by half a percentage point in July, compared to 42% on Monday.