No Fed dread in bond markets with yields near multi-week lows

[LONDON] Europe's benchmark bond yield held near seven-week lows as analysts said weak growth and inflation may encourage the US central bank to adopt a cautious tone after a widely expected rate hike at its meeting on Wednesday.

Germany's 10-year yield and most other euro zone equivalents were flat on the day, as were US Treasury yields, which have not strayed far from seven-month lows hit in early June.

Markets have fully priced the prospect of the Fed raising its benchmark rate to a target range of 1.00 to 1.25 per cent, but investors are waiting for any signals on the future path of rates or details on plans to shrink its massive balance sheet.

Following a lacklustre first quarter for economic growth and a retreat in headline inflation to 1.5 per cent from 1.8 per cent earlier in 2017, there is doubt over whether policymakers can stick to their anticipated pace of tightening of three interest rate rises this year and next.

There are also growing doubts on the size and scope of fiscal stimulus the Trump administration may inject into the US economy with campaign promises on tax reform, financial regulation rollbacks and infrastructure spending either still on the drawing board or facing hurdles in Congress.

"There is a very large probability of the US...ratcheting up the Fed funds target range," DZ Bank's Hendrik Lodde said. "It should therefore be more intriguing to see...whether it is still planning on implementing one further tightening step in the present year... Doubts on this score have surfaced of late." Few economists polled by Reuters expect major changes in the Fed's quarterly projections for growth, unemployment and inflation which it will also release on Wednesday.

Investors will also be looking for a clearer steer on the timing and details of its previously announced plan to reduce this year its US$4.2 trillion portfolio of Treasury debt and mortgage-backed securities, most of which were purchased in the wake of the financial crisis to help bolster the economy.

German 10-year yields were flat at 0.26 per cent on Wednesday, just off a seven-week low 0.244 per cent hit in recent sessions.

US equivalents were unchanged at 2.20 per cent, having struck 2.13 per cent - the lowest level since November - earlier this month.

The gap between the two benchmarks edged away from a one-month wide point of 197 basis points hit in the wake of a European Central Bank meeting last week in which policymakers pledged to maintain ultra-easy policy as inflation remained weak.

The ECB's stance has helped boost sentiment towards southern European bond markets, with Italian and Portuguese bond yields extending recent falls to hit new multi-month lows at 1.94 per cent and 2.87 per cent respectively.

REUTERS