September 18, 2019 / 7:34 AM / a month ago

Euro zone bonds steady as market awaits second US rate cut of year

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

By Dhara Ranasinghe

LONDON, Sept 18 (Reuters) - Euro zone bond yields hardly budged on Wednesday before a Federal Reserve meeting that is expected to end with the second U.S. interest rate reduction of the year.

Spanish bonds were steady, brushing off news that Spain will hold its fourth election in four years on Nov. 10, after rival parties failed to break a months-long impasse in a deeply fragmented parliament.

In early trade, most 10-year bond yields in the euro zone held below six-week highs reached after Thursday’s European Central Bank meeting.

After last week’s ECB rate cut and stimulus package, the Fed is widely expected to lower its target rate by 25 basis points, to between 1.75% and 2.00%.

A divided Fed is facing pressure from the White House for steep interest rate cuts and an unexpected jump in overnight borrowing costs.

The cost for banks and Wall Street dealers to borrow dollars in the overnight repurchase agreement market rose as high as 10% on Tuesday. It fell after the New York Federal Reserve said it would conduct a repurchase operation to lower the funding costs.

“Everyone knows a rate cut is expected, but we’ll be looking at the statement and the dot plot,” said Pooja Kumra, European rates strategist at TD Securities in London, referring to where policymakers expect rates to be in the future.

“There will also be a lot of focus on what the Fed says about the short-term funding squeeze.”

Germany’s benchmark 10-year bond yield was little changed at -0.48%, below last week’s six-week high of -0.43%.

Spain’s 10-year bond yield was also steady, trading at 0.29% , after news that new elections will be held. The country has been in political limbo since Socialists emerged as the biggest party in April’s parliamentary elections but without enough seats to govern on their own.

Analysts said the prospect of a new round of ECB asset purchases offset the political uncertainty. The ECB announced open-ended asset purchases last week to boost growth and inflation.

There was some focus on Germany, which sells 30-year bonds later this session after a weak sale of longer-dated bonds last month.

“The recent rise in long-term yields might make the Bund more attractive to investors, also in light of the new round of QE (quantitative easing),” UniCredit analysts said in a note. (Reporting by Dhara Ranasinghe, editing by Larry King)

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