January 12, 2017 / 9:16 AM / a year ago

UPDATE 3-Euro zone bond yields tumble as Trump trade suffers setback

* Euro zone bond yields fall after Trump news conference

* U.S. bond yields fall to more than one-month lows

* Upbeat data, ECB dissent pushes euro zone yields off lows

* Italy sells 7.25 bln euros of debt (Updates prices for close)

By Dhara Ranasinghe

LONDON, Jan 12 (Reuters) - German bond yields moved further away from three-week highs on Thursday as U.S. President-elect Donald Trump’s long-awaited news conference offered little clarity on his fiscal plans, denting “reflation” bets that have dominated markets recently.

Borrowing costs in the euro area nevertheless nudged off their lows after data highlighted brighter economic prospects for the region and European Central Bank minutes showed some policymakers wanted to rein in the bloc’s monetary easing.

Since Trump’s election win on Nov. 8, stocks have soared and bonds have taken a beating on expectations that the economic policies of a Trump administration would fuel growth and inflation.

But at his first news conference since the election, Trump on Wednesday gave no details on tax cuts and infrastructure spending, stalling a reflation-driven rise in world bond yields.

“There’s no escaping the fact that there is huge uncertainty about what will actually be implemented in the U.S.,” Pictet economist Frederik Ducrozet said.

Germany’s 10-year bond yield, the benchmark for borrowing costs in the euro area, fell as much as 5 basis points to 0.21 percent, its lowest level in just over a week, before closing at 0.24 percent. It is down about 10 bps from a three-week high hit on Monday.

U.S. 10-year Treasury yields fell to their lowest level in 1-1/2-months at around 2.31 percent, while the U.S. dollar sank to a five-week low against the yen.

Euro zone inflation expectations, measured by the five-year, five-year breakeven forward, meanwhile pulled back from a 13-month high hit earlier this month to stand at around 1.76 percent.


Across the euro zone, bond yields were 2-5 bps lower on the day, with stronger economic news taking the edge off a rally in prices. A bond’s yield and its price move in opposite directions.

Euro zone industrial output rose by a larger-than-expected 1.5 percent in November from a month earlier, while a preliminary estimate put Germany’s economic growth in 2016 at 1.9 percent - the strongest rate in five years.

The data adds to signs of a pick up in both economic growth and inflation that suggests the record lows seen in bond yields last year are unlikely to be revisited in 2017.

HSBC said on Thursday it had revised up its forecasts for German Bund yields, which it no longer sees falling into negative territory.

“We have revised our forecast for the 10-year Bund yield higher by 65 basis points to 0.60 percent at end-Q3 before falling to 0.35 percent year-end from minus 0.20 percent previously,” the bank said in a note.

Opponents of the ECB’s money-printing programme openly voiced their dissent at the central bank’s latest meeting, when it extended its stimulus programme despite improving economic conditions, accounts showed on Thursday.

With euro zone inflation rebounding, the ECB is facing calls, particularly in Germany, to pare back of its 2.3 trillion euros ($2.46 trillion) bond-buying scheme.

Elsewhere, Italy raised the top planned amount of 7.25 billion euros ($7.7 billion) at an auction of three bonds, paying lower three- and seven-year yields compared to late 2016 thanks to easing political risks.

A court on Wednesday rejected a bid by Italy’s biggest labour union to hold a referendum on recent rule changes that made it easier to fire workers.

Italian bonds face another test on Friday, when ratings agency DBRS is set to announce the results of a review of the country’s credit rating. (Editing by Catherine Evans and Janet Lawrence)

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