LONDON (Reuters) - Government bond yields in the euro area fell and stock markets rallied on Wednesday after remarks from U.S. Federal Reserve Chair Janet Yellen dampened growing expectations of more than one interest rate hike for the rest of the year.
In a prepared testimony to be delivered to Congress later on Wednesday, Yellen said the Fed would not need to raise rates "all that much further" to reach current low estimates of the neutral fed funds rate.
The comments bought a wave of relief across world markets, which have been rattled in the past two weeks by comments from major central banks viewed as signalling an end to an era of ultra-loose monetary policy.
The Bank of Canada lifted interest rates on Wednesday, a move anticipated by markets following recent hawkish comments from central bank officials.
"Yellen's comments suggest the Fed is no hurry to hike rates further and that any further moves are likely to be measured," said Orlando Green, European fixed income strategist at Credit Agricole.
U.S. and European stock markets rallied. The pan-European STOXX 600 equity index rose over 1.5 percent to a two-week high and all sectors were in positive territory.
U.S. 10-year Treasury yields fell to their lowest level in over a week, dragging euro zone peers with them.
In the single currency bloc, 10-year bond yields tumbled 4-7 basis points.
Germany's benchmark Bund yield fell 5 bps to 0.508 percent, its lowest level in almost a week and down from 18-month highs hit earlier this week at 0.58 percent.
Decent demand at a sale of German 10-year bonds, the first auction of the long-dated debt since a sharp sell off began two weeks ago, also helped boost sentiment.
Germany sold around 4 billion euros of new 10-year Bunds.
"Our expectation going into the auction was that the 60 basis point yield would be a good level for outright investors to enter the market, so I'm not surprised it went well," said Mizuho rates strategist Antoine Bouvet.
Reporting by Dhara Ranasinghe; additional reporting by Kit Reese, editing by Pritha Sarkar