November 29, 2018 / 8:37 AM / in 6 months

Euro zone bonds in demand as U.S. 10-yr yield falls towards 3 pct

* Powell’s comment fuels hopes of fewer rate hikes

* German 10-yr yield dips to 3-month low of 0.328 pct

* Italian borrowing costs lower ahead of auction

* Euro zone periphery govt bond yields

By Abhinav Ramnarayan

LONDON, Nov 29 (Reuters) - Major euro zone government borrowing costs dipped to their lowest level in over two months on Thursday, following U.S. Treasury yields lower, on hopes the U.S. Federal Reserve will be more cautious than previously thought when hiking rates.

Fed Chair Jerome Powell said on Wednesday that the policy rate is now “just below” estimates of a level that neither brakes nor boosts a healthy economy.

Many investors read these comments as a signal the Fed’s tightening cycle is drawing to a close.

“For me Powell’s comments are not really a dovish turn, but more like a message for the financial market that the Fed is watching how the economy is evolving,” said DZ Bank analyst Rene Albrecht.

“But it is a signal they are not a pre-set course to hiking rates, so the market is reacting to that,” he said.

Powell’s comments triggered a rally in U.S. stocks and pushed the U.S. Treasury 10-year bond yield as low as 3.01 percent on Thursday morning, its lowest level since mid-September and well away from this month’s high of 3.25 percent.

The spread between 2-year and 10-year yields fell to 23 basis points, close to an 11-year low of 19 bps hit in late August.

Euro zone government bond yields followed for the most part, with German 10-year yields hitting a three-month low of 0.328 percent in early trade, down 2.5 basis points on the day, before easing to 0.338 percent.

French and Dutch government bond yields also dipped to their lowest since early September at 0.716 percent and 0.472 percent respectively, down about 2 bps each on the day.

The yields of major government bond markets tend to track each other as many investors switch between them. They are also affected by the actions of the Fed, widely considered the most powerful central bank in the world.


Meanwhile, Italy’s government bond yields also dipped on Thursday ahead of an auction of five-year and 10-year bonds which is widely expected to be met with much stronger demand than last week’s BTP Italia deal targeted at retail investors.

That deal may have prompted Italian politicians to make compromising noises this week on budget talks with the European Commission. Economy Minister Giovanni Tria said on Wednesday Italy is looking for ways to contain public spending while supporting flagging economic growth in a bid to head off disciplinary action by the European Commission.

Albrecht of DZ Bank said this changed tone, coupled with the still-high yields on Italian debt, should support Thursday’s auction.

Italy’s five-year bond yield dipped 4 bps to 2.36 percent and the 10-year yield was lower 1.5 bps at 3.25 percent. The closely-watched spread over Germany was at 294 bps. (Reporting by Abhinav Ramnarayan Editing by Raissa Kasolowsky)

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