July 17, 2019 / 10:15 AM / 2 months ago

UPDATE 3-Euro zone bond yields renew slide, Italian yields at lowest since 2016

* Yields down 4 to 6 bps

* Fed overnight comments in focus

* Italian BTPs continue outperformance

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices)

By Dhara Ranasinghe and Abhinav Ramnarayan

LONDON, July 17 (Reuters) - Euro area government bond yields tumbled on Wednesday after U.S. Federal Reserve officials reinforced expectations they would cut interest rates this month and suggested they are debating how deep that cut should be.

Comments from President Donald Trump that the United States still has a long way to go to conclude a trade deal with China, and growing concern about prospects of a no-deal Brexit, added to a sense of renewed uncertainty in world markets.

Italy’s 10-year bond yield fell to its lowest since late 2016 at 1.57%, before settling at around 1.59% by the close. Most other euro zone bond yields were also heading back towards recent record lows.

French 10-year bond yields fell 5 basis points to minus 0.04%, moving towards record lows hit in early July at around minus 0.14%.

Across the euro zone, 10-year bond yields were down 3-6 bps, with German Bund yields at minus 0.29%.

Chicago Federal Reserve President Charles Evans said on Tuesday that an interest rate cut of half a percentage point this month could ensure the Fed met 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.

“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.

Heightened indications of U.S. monetary easing have fuelled expectations the European Central Bank will cut rates in September to boost inflation and protect the economy from a global trade war.

Richard McGuire, head of rates strategy at Rabobank, said weak European car sales data on Wednesday reinforced the case for ECB easing.

“This (data) feeds into the manufacturing sector bearing the brunt of the trade wars and galvanising expectations for ECB easing, which is supportive for German and Italian bond yields,” he said.

ECB board member Benoit Coeure said on Wednesday that the Governing Council was ready to act if necessary to help inflation move towards its near 2% target.

Speculation over easing, together with negative yields in higher-rated bond markets such as Germany and a soothing in tensions between Rome and the EU over fiscal policies, have boosted Italian bonds this month.

The Italian/German 10-year bond yield gap tightened to 184 bps at one stage, while the two-year Italian bond yield dipped back into negative territory. It was trading around zero by the close.

“Italy is under-owned by many international investors,” said Marco Meijer, senior interest rate strategist at BNP Paribas.

“The window to have snap elections this year is closing fast. With no major news expected until the 2020 Budget Law discussions starting in October, the carry on offer on Italy is probably too good to resist over the summer,” he added.

Reporting by Dhara Ranasinghe, Editing by Catherine Evans and John Stonestreet

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