Eurozone yields tick up as Fed cut underwhelms

LONDON, Aug 1, (RTR): Core eurozone bond yields held close to all-time lows on Thursday after US Federal Reserve Chairman Jerome Powell tempered bets on more rate cuts after the central bank’s first cut in more than a decade.

Ten-year bund yields fell sharply ahead of the Fed meeting to hit new record lows of -0.442%, and remained close to this level at -0.428% in early trade.

The Federal Reserve cut interest rates on Wednesday, but the head of the US central bank said the move might not be the start of a lengthy campaign to shore up the economy against risks including global weakness.

“Let me be clear – it’s not the beginning of a long series of rate cuts,” Powell said in a news conference after the Fed released its latest policy statement. At the same time, he said: “I didn’t say it’s just one rate cut.”

US Treasury yields rose after the announcement and were seen 3 basis points higher at 2.0456%.

In the United States, shorter-dated yields rose as traders scaled back positions on future rate cuts, while longerdated yields fell on the Fed’s muted inflation outlook and the halting of its balance sheet normalisation two months early.

Mizuho rates strategist Peter McCallum noted that despite Powell’s reference to “mid-cycle adjustment”, the United States’ vast corporate debt and close to contraction manufacturing sectors suggest a much weaker outlook.

“This insurance cut looks very unlikely to be enough to raise inflation or materially prolong the cycle,” he said.

“The market should look through this 25 basis point cut, they have wasted ammunition and we think Treasuries will continue to be supported at the long end.”

Other 10-year yields in the bloc were around two basis points higher,.

Meanwhile, data showed that factory activity has contracted across Asia and Europe in July, fuelling worries a prolonged US-China trade war and an economic slowdown could tilt the world towards recession, which central banks would have to fight with depleted ammunition.

Manufacturing activity in the euro zone fell at its steepest rate since late 2012 last month as demand sank, a survey compiled by IHS Markit showed, puncturing sentiment among factory managers.

Forward-looking indicators in Thursday’s survey suggest manufacturing will not rebound anytime soon and is likely to embolden policymakers at the European Central Bank, who last week all but promised to ease policy further as the bloc’s growth outlook deteriorates.

This is likely to keep downward pressure on eurozone bond yields which are already highly negative.

Data from Tradeweb on Thursday showed that more than 40% of European investment grade corporate debt is now negative yielding, while the pool of euro zone government bonds with negative yields also surged in July to 4.8 trillion euros or around 60% of the total.