Cautious Yellen soothes euro zone bond markets

LONDON (Reuters) - Germany’s benchmark 10-year government bond yield held near a one-week low on Thursday as cautious comments on inflation from U.S. Federal Reserve chief Janet Yellen dampened talk for another rate rise later this year.

The Federal Reserve Board Chairwoman Janet Yellen testifies before a House Financial Services Committee hearing covering monetary policy on Capitol Hill in Washington, U.S., July 12, 2017. REUTERS/Aaron P. Bernstein

In testimony delivered to Congress on Wednesday, Yellen said the Fed would not need to raise rates “all that much further” to reach current low estimates of the neutral fed funds rate.

Bond yields in Europe and the U.S. fell sharply after the comments, which have brought some comfort to world bond markets unnerved in the past two weeks by signs that major central banks are stepping up efforts to unwind ultra-loose monetary policies.

“After the strong sell off we’ve had over the last two weeks, we are entering into a period of relief in the short term,” said Patrick Jacques, European rates strategist at BNP Paribas.

Germany's benchmark 10-year Bund yield was flat on the day at 0.51 percent DE10YT=TWEB, within sight of a one-week low hit the previous session and down from 18-month peaks set earlier this week at around 0.58 percent.

Italian bond yields IT10YT=TWEB faced slight upward pressure ahead of a government bond auction later in the day, while other euro zone yields were steady to 1 basis point higher on the day.

Data on Thursday highlighting subdued inflation in the euro zone also suggests there is no rush for the European Central Bank to scale back its monetary stimulus and should support bond markets, analysts said.

Annual inflation in Germany, harmonised to compare with other European countries, was confirmed at 1.5 percent in June. Year-on-year inflation in France eased to a seven-month low of 0.8 percent in June, unchanged from a preliminary estimate.

“The inflation numbers in Germany are somewhat cheering, but it is all about the overall picture for the euro zone,” said Naeem Aslam, chief market analyst at Think Markets UK.

“It indicates that inflationary pressure is subdued. Hence, there is no rush in changing the gear for monetary policy.”

Focus was expected to turn back to the Fed later in the day, with Yellen testifying before the Senate Banking Committee.

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Reporting by Dhara Ranasinghe; Editing by Janet Lawrence