March 20, 2019 / 8:49 AM / 9 months ago

UPDATE 2-Euro zone bond markets wait patiently for Powell

* Euro zone periphery government bond yields (Updates move in gilt yields, prices)

By Virginia Furness

LONDON, March 20 (Reuters) - Core euro zone bond yields fell on Wednesday from 1-1/2 week highs hit earlier this week as the market waited for further clarity on the direction of U.S. interest rates and analysts struggled to make sense of the UK’s Brexit negotiations.

After the European Central Bank earlier this month acknowledged slowing growth while unveiling a new cheap loan stimulus programme, markets waited to find out what “patient” U.S. Federal Reserve Chairman Jerome Powell does at the end of a two-day meeting.

Market pricing suggests the next move by the Fed will be a rate cut, likely in 2020, though most analysts expect one more hike this year, probably in June.

“In our view the market is not anticipating the extent of hawkishness that we expect from the Fed at today’s meeting,” wrote Mizuho rates strategists in a note.

“The Fed’s time in the dovish camp has led to an easing in financial conditions, and seen a strengthening labour market.”

The Fed on Wednesday is expected to hold rates steady, shave the number of hikes projected for the rest of the year and release long-awaited details of a plan to end the monthly reduction of its massive balance sheet.

Ten-year U.S. Treasury yields fell 2.5 basis points to 2.58 percent.


There was some downward pressure on euro zone bond yields from gilts as the latest Brexit developments unfolded.

British 30-year government bond yields fell to their lowest since September 2017 and sterling slid after Prime Minister Theresa May asked Brussels for a short Brexit delay.

May asked for three months to buy time to get her twice-rejected departure deal through parliament, but the request faced immediate resistance from the European Commission.

In late trade, Germany’s 10-year bond yield was down 2.5 bps at 0.08 percent.

The most liquid benchmark in the bloc touched a high of 0.124 percent on Tuesday, after expectations of a Brexit delay and following a report that any new round of ECB quantitative easing would be expanded to include equities.

French 10-year government bond yields were down 2 bps at 0.45 percent, while peripheral bond yields were marginally higher, IT10YT-RR.

Elsewhere, Germany sold 3.209 billion euros of five-year bonds. (Reporting by Virginia Furness; editing by Ken Ferris)

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