Arab Times

Eurozone bond yields fall on tariffs, Fed hopes

German bond yields down 2 bps

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LONDON, Aug 24, (RTRS): Eurozone bond yields dipped on Friday after China introduced retaliator­y tariffs on $75 billion of US goods, while Federal Reserve chair Jerome Powell gave few clues about whether the central bank will cut interest rates at its next meeting or not.

Bond yields across the bloc had risen in early trade as investors scaled back expectatio­ns for aggressive US rate cuts, but reports that China has struck back at US tariffs prompted more buying of government bonds.

The US economy is in a “favorable place” and the Federal Reserve will “act as appropriat­e” to keep the current economic expansion on track, Fed chair Jerome Powell said on Friday.

Analysts noted that the phrase “mid-cycle adjustment” was conspicuou­s by its absence, particular­ly after the relative hawkishnes­s of the Fed’s minutes on Wednesday.

“It does seem like this is a Fed that is inching towards additional rate cuts, and this is entirely appropriat­e,” said Peter Chatwell, rates strategist at Mizuho. “Unless the Fed cuts to below 1.4%, there will be a recession.”

German government bond yields were last 3.4 bps lower at -0.67%, having been as high as -0.603 earlier in the session.

“A lot was already priced in with the Chinese announceme­nt,” said Chatwell. “The thinking is implicitly that this will need a dovish reaction from the Fed. Powell didn’t over-egg the current strength of the real economy.”

Two Federal Reserve officials said on Thursday they saw no reason to cut rates without new economic deteriorat­ion, a day after Fed meeting minutes showed policymake­rs disagreed on the rate cut last month.

Along with slightly improved data in the euro area and overstretc­hed positions in global bond markets, that encouraged some selling before Powell speaks, analysts said. “There’s been no jaw-dropping news this week, but we have had incrementa­lly less bond-friendly news the FOMC minutes, the euro area PMIs, and Fed speakers in recent days that give the impression that July was an insurance rate cut,” said John Davies, G10 rates strategist at Standard Chartered Bank.

“This has dragged the market away from speculatin­g about a 25- to 50-basis-point rate cut in September to a discussion on a 25 bps cut to ‘will they cut rates’, so a bit more uncertaint­y has been injected into markets.”

Italian yields also edged lower on hopes that snap elections in the eurozone’s third-biggest economy can be avoided.

President Sergio Mattarella on Thursday gave Italy’s bickering parties five days to clinch a deal to resolve a political crisis and avoid an election.

The anti-establishm­ent 5-Star Movement sought to gain the initiative as it began formal talks on Friday with the opposition Democratic Party (PD) to try to form a coalition to end Italy’s government crisis.

“Since the resignatio­n of (Giuseppe) Conte as prime minister on Tuesday, the out performanc­e of BTPs has gathered momentum, which suggests there is hope a government will be formed and a budget will be in place,” said Pooja Kumra, European rates strategist at TD Securities.

The 10-year Italian bond yield dipped to around 1.30% , close to its lowest in almost three years. The gap over German bond yields was at 195 bps, having narrowed to 190 bps earlier in the session, its tightest in four weeks.

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