Euro zone bond yields nudge down as spotlight turns to Powell’s Fed testimony

Image from Reuters
Image from Reuters

Euro zone government bond yields inched down on Tuesday, with trade largely subdued ahead of a testimony by Federal Reserve Chairman Jerome Powell to Congress.

Solid US retail sales data on Monday had pushed US and European bond yields higher as markets bet that a strong economy would keep the Fed on the path of raising interest rates.

But there was calmer tone to markets on Tuesday, reflecting a reluctance by investors to push yields any higher ahead of the first leg of Powell’s two-day testimony.

Powell is expected to express confidence in the US economy and affirm the Fed’s gradual approach to raising short-term interest rates, while analysts said they will also be watching closely any comments on the impact of trade tensions and the marked flattening of the US Treasury curve.

The Fed’s rate-hike campaign has stoked worries that short-term yields would eventually rise above long-dated yields, causing the yield curve to invert. An inverted yield curve has preceded the past five US recessions.

“The main message will be that the Fed remains on course to hike rates further, which is discounted by markets,” said KBC rates strategist Mathias van der Jeugt.

“But if he steps up rhetoric on the downside risks stemming from a trade war, markets will start casting doubt on the rate hike trajectory.”

Ten-year bond yields across the euro area were down 0.5 to 2 basis points on the day, with southern European bonds outperforming.

Italy’s 10-year bond yield fell 2 bps to 2.56pc, pushing the gap over German Bund yields to its tightest in almost four weeks.

Germany is scheduled to sell €3bn of two-year government bonds on Tuesday in the first of this week’s hefty bond supply.

According to Commerzbank, supply from the euro zone issuers this week will total around €17bn.


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