October 31, 2019 / 12:07 PM / 21 days ago

UPDATE 2-Euro zone bond yields set for biggest daily fall in October on Fed cut, trade war

* German 10-year Bund yield falls to two-week low

* Set for biggest daily fall in over a month

* Fed cuts rates, European growth data beats expectations

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates with move in German Bund yield)

By Yoruk Bahceli

LONDON, Oct 31 (Reuters) - Euro zone bond yields fell to two-week lows on Thursday and were set for their sharpest daily fall in October, after the U.S. Federal Reserve cut rates and doubts about U.S.-China trade talks drove demand for safe-haven assets.

The Fed on Wednesday lowered its key rate by a quarter of a percentage point to 1.50%-1.75% to help the U.S. economy weather a global trade war. But it also dropped a reference in its policy statement to acting “as appropriate” to sustain economic expansion - language considered a sign of future rate cuts.

Chairman Jerome Powell said some of the risks that had convinced Fed officials lower rates were needed, if only as insurance, seemed to abate in recent weeks.

The Fed rate cut and renewed concern about trade tensions bolstered bond markets at the end of a month that has seen heavy selling.

Chinese officials have doubts about whether it is possible to reach a comprehensive long-term trade deal with Washington and U.S. President Donald Trump, Bloomberg reported on Thursday, citing unnamed sources.

They have told visitors to Beijing and others in private conversations that China will not budge on the thorniest issues, the report said.

“It might seem ...surprising as the Fed delivered a hawkish cut,” said ING senior rates strategist Antoine Bouvet of Thursday’s fall in yields. “But the market had moved probably too high into the meeting in terms of yields. The market might not share the Fed’s optimism on the economy.”

Most euro zone 10-year bond yields were down around 5 basis points on the day , having hit their lowest levels in around two weeks.

Germany’s benchmark 10-year yield fell as low as -0.42% and was set for its biggest daily fall in October, as was the case for most other euro zone bond yields.

U.S. 10-year Treasury yields were 9 bps lower on the day , while British and Swiss bond yields were also sharply lower.

Despite Thursday’s falls, bond yields are set to end October significantly higher, mostly driven by expectations that Britain will avoid a no-deal Brexit.

Germany’s 10-year yield was on track for its biggest monthly rise since January 2018, up 17 bps in October.

With the Fed and trade tensions dominating, there was little market reaction to third quarter euro zone economic growth data, which defied market expectations of a slowdown and was steady quarter-on-quarter.

Meanwhile headline inflation slowed because of a sharp fall in energy prices.

Elsewhere, the first fixing of the euro zone’s first overnight rate ESTR following the implementation of the European Central Bank’s tiered interest rates was unchanged at -0.545%.

Analysts are watching the impact of tiering on money markets, as the system, which exempts banks from paying the ECB the deposit rate of -0.50% on part of their excess cash, had stoked fears that short-term interest rates could increase.

Reporting by Yoruk Bahceli, additional reporting by Dhara Ranasinghe; editing by Larry King and Kirsten Donovan

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