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Euro zone bond yields inch up as Fed tempers big rate cut bets

London

GERMANY'S 10-year bond yield nudged off record lows on Wednesday, after comments from US Federal Reserve officials tempered the most aggressive US rate cut bets.

Fed Chairman Jerome Powell and St. Louis Federal Reserve Bank President James Bullard on Tuesday pushed back on market expectations and presidential pressure for a significant US interest rate cut of half a percentage point as soon as its next meeting.

A modest sell-off in US Treasuries, spilled over into the euro zone but the rise in bond yields was tepid.

Analysts put that down to two reasons.

One, solid expectations that rate cuts from the European Central Bank and possibly other easing measures are coming soon.

Two, demand for safe assets such as German bonds are high because of worries about geopolitical tensions in the Middle East and a protracted trade war.

"The German Bund yield was already at all-time lows, so there was no big reason to react to what happened overnight in the US," said KBC rate strategist Mathias van der Jeugt.

"The ECB compass is back at easing and unless we get a dramatic pick-up in data we are stuck at current levels for some time."

In early European trade, most 10-year bond yields in the single currency bloc were 1-2 basis points higher on the day.

Germany's 10-year Bund yield rose 1.5 bps to minus 0.32 per cent, edging off Tuesday's record low at minus 0.336 per cent.

Still, it is set to end the quarter down 25 basis points in its third straight quarter of declines.

The French 10-year bond yield briefly dipped to -0.004 per cent .

In contrast, US Treasury yields were 2-3 bps higher, with 10-year yields back above 2 per cent following the Fed comments.

According to latest data from CME Group's FedWatch programme, federal funds futures implied that traders saw a 27 per cent chance of the Fed lowering rates by half a percentage point in July, compared to 42 per cent on Monday.

"Unless the Fed modifies its rhetoric and hints that too many rate cuts are priced in by investors in the medium-term, or unless there is a positive breakthrough in the US-China trade negotiations as early as at the end of this week, we do not see the case for a pronounced sell-off in US Treasuries," UniCredit analysts said in a note. REUTERS