July 14, 2017 / 10:47 AM / 2 months ago

UPDATE 2-Patient Fed takes sting out of euro zone bond rout

* Centrist Kaplan urges slow approach on rate hikes

* Benign U.S. inflation data supports bonds

* German bond yields fall from 18-month high

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds U.S. data)

By John Geddie

LONDON, July 14 (Reuters) - Euro zone bond yields fell on Friday, taking their cue from the patient approach of top U.S. policymakers on interest rate hikes and benign inflation data from 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 on Wednesday that rates would not go “all that much further”.

These cautious signals 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.

“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 percent chance of a hike over the next year, according to CME’s FedWatch tool.

Meanwhile, 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.

Reuters reported exclusively on Friday that the ECB is keen to keep its asset purchases open-ended rather than setting a potentially distant date on which bond-buying will stop, an approach to retain flexibility in case the outlook sours.

TRACKING TREASURIES

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

Doves and Hawks: A look at where U.S. Fed officials stand on interest rate hikes here

The bloc’s benchmark German 10-year yield fell as much as 4 basis points to 0.49 percent, before trimming falls by late trade to around 0.52 percent. It remained below an 18-month high hit earlier this week of 0.583 percent.

All other euro zone yields were down 1-3 bps on the day. U.S. Treasuries extended the fall that started on Thursday, hitting multi-week lows as benign U.S. inflation data in June and an unexpected fall in retail sales fuelled doubts about an interest rate increase later this year.

U.S. inflation was unchanged in June, following a 0.1 percent dip in May. The so-called core CPI, which strips out food and energy costs, edged up just 0.1 percent in June. The core CPI increased 1.7 percent year-on-year after a similar gain in May.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

Reporting by John Geddie; Editing by Andrew Heavens and Hugh Lawson

Our Standards:The Thomson Reuters Trust Principles.
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