Fed's patience takes sting out of euro zone bond rout

[LONDON] Euro zone bond yields fell on Friday, taking their cue from the patient approach of top US policymakers on interest rate hikes ahead of inflation data in the world's largest economy.

The centrist Dallas Fed President Robert Kaplan advocated late on Thursday a go-slow approach on further hikes which chimed with Fed chair Janet Yellen's comments that the central bank rate would not go "all that much further".

These cautious comments have taken the sting out of a sell-off in the bloc's bond market that has been gathering steam over the past few weeks on rising expectations that the European Central Bank is set to wind down its asset purchase programme.

A Reuters poll of economists released on Friday showed that the ECB is likely to wait until September before announcing a shift away from its ultra-easy policy, while a move at the July meeting next week is seen as too close to call.

"They (Fed comments) add to our conviction that no further Fed hike should be expected for the rest of the year, which should prove reassuring for markets concerned about excessive tightening risk globally," Mizuho's head of euro rates strategy Peter Chatwell said.

Money markets pricing suggests less than a 50 per cent chance of a hike over the next year, according to CME's FedWatch tool.

The fall in euro zone yields tracked a move lower in US equivalents which came after Kaplan - who is usually fairly centre-ground on monetary policy - made his comments late on Thursday.

The bloc's benchmark German 10-year yield fell some three basis points when European trading started on Friday to 0.50 per cent, moving away from an 18-month high hit earlier this week of 0.583 per cent.

All other euro zone yields were down around three bps on the day.

The final major event of the week for investors is US inflation data due to be released later on Friday, although expectations remain muted.

The core consumer price index (CPI) is forecast to have risen only 1.7 per cent year-on-year in June after a similar gain in May. On a month-on-month basis, the core CPI is expected to rise 0.2 per cent after a 0.1 per cent gain the previous month.

REUTERS