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Eurozone bond yields fall as Fed debates July rate cut

London

THE euro area's government bond yields tumbled on Wednesday after comments by US Federal Reserve officials reinforced expectations they would cut interest rates this month and suggested they are debating how deep that cut should be.

Chicago Federal Reserve President Charles Evans said on Tuesday that an interest rate cut of half a percentage point this month could assure the Fed meets its inflation goal sooner.

Dallas Fed President Robert Kaplan, until recently a sceptic that rates should be cut at all, said he now thinks a "tactical" reduction of a quarter point could address the risks apparently seen by bond investors, who have pushed some long-term yields below shorter-term ones.

The comments set the tone for the start of bond trading in Europe, with 10-year bond yields in the eurozone falling 2 to 4 basis points (bps).

Germany's 10-year bond was down 2.5 bps at minus 0.31 per cent and heading back towards the record lows reached earlier this month at around minus 0.41 per cent.

"It is very likely that we will get a rate cut in July and now the discussion is about whether we get a 25 or 50 bps cut," said Daniel Lenz, a rates strategist at DZ Bank.

Fed Chair Jerome Powell on Tuesday reiterated a pledge to "act as appropriate" to keep the US economy humming, validating expectations that a rate cut is on the way.

Heightened expectations for US monetary easing have fuelled expectations that the European Central Bank will cut rates in September to boost inflation and protect the economy from a global trade war.

The ECB's Benoit Coeure said on Wednesday that incoming economic data and survey information pointed to weaker economic growth in the second and third quarters. REUTERS