March 20, 2019 / 12:49 PM / 3 months ago

UPDATE 1-Euro zone bond markets wait patiently for Powell

* Euro zone periphery government bond yields (Updates pricing, adds detail on Spanish economic growth)

By Virginia Furness

LONDON, March 20 (Reuters) - Core euro zone bond yields on Wednesday edged off 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 are waiting to see what “patient” U.S. Federal reserve Chairman Jerome Powell does next.

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 interest 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 dipped a basis point in European trade and were last seen at 2.60 percent.


The UK’s Brexit negotiations could also move markets, though rates strategists were unsure in which direction.

Prime Minister Theresa May will request a short delay to Brexit on Wednesday after her failure to get a divorce deal ratified left the United Kingdom’s divorce from the European Union in turmoil.

The European Union has done a lot to accommodate Britain over Brexit and can go no further, European Commission head Jean-Claude Juncker said on Wednesday as he played down hopes of a breakthrough at this week’s EU summit.

Core euro zone rates held firm with Germany’s 10-year government bond trading around a yield of 0.10 percent .

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

The move was the bund’s biggest one-day rise in almost three weeks.

The French economy should grow about 1.4 percent this year, Finance Minister Bruno Le Maire said, revising down the forecast of 1.7 percent growth in this year’s budget.

French 10-year government bond yields were largely flat and were last seen at 0.468 percent.

The Spanish economy also expanded as stronger-than-expected domestic demand offset a slowdown in exports due to weaker euro-zone growth, the Bank of Spain said on Wednesday.

Spanish gross domestic product grew 0.6 percent in the January to March period from a quarter earlier, the bank said.

Spanish 10-year government bond yields were last quoted at 1.179 percent, flat on the day.

Elsewhere peripheral bond yields were marginally higher , IT10YT-RR.

On the supply side, Germany sold 3.21 billion euros of bonds maturing in 2024, while Italy announced its intention to issue a Panda bond — yuan denominated bonds sold in the onshore Chinese bond market — and completed a two billion euro debt swap. (Reporting by Virginia Furness; editing by Ken Ferris)

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