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5 months ago
UPDATE 2-Euro bond yields near lows as investors read monetary policy runes
April 6, 2017 / 11:50 AM / 5 months ago

UPDATE 2-Euro bond yields near lows as investors read monetary policy runes

* Yields hover just above multi-week lows

* Fed balance sheet trim could slow rate hikes

* Bonds unmoved as Czechs abandon currency cap

* Chance of ECB rate rise in Dec below 20 percent

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds ECB minutes, Czech cap removal)

By John Geddie

LONDON, April 6 (Reuters) - Euro zone government bond yields hovered near multi-week lows on Thursday as investors weighed up the outlook for monetary policy in two of the world's largest economic blocs.

Minutes from the U.S. central bank's last meeting released late on Wednesday showed most policymakers favour trimming its $4.5 trillion balance sheet later this year.

While this would be a tightening move, some analysts said it may affect other policy levers and slow the pace of interest rate hikes, prompting a mixed market reaction.

Suggestions from the U.S. House of Representatives Speaker Paul Ryan that fiscal stimulus via tax reform could be some way off was also seen capping moves in U.S Treasury yields and, in turn, the euro zone's flagship German yield, which has halved over the past three weeks.

In Europe, comments from European central bankers Mario Draghi, Peter Praet and Vitor Constancio suggested the ECB would not change its policy message this month in the face of mounting calls from Germany for it to wind down its stimulus.

A source close to ECB discussions told Reuters last week that changes to its forward guidance had been over-interpreted by markets, which had immediately begun to price in the prospect of rate increases at the end of the year.

"The FOMC's focus on ending its re-investments and downbeat comments on a swift U.S. tax stimulus weighed on risk sentiment," Commerzbank analyst Rainer Guntermann said.

Thursday's ditching by the Czech central bank of its cap on the crown against the euro had little effect on euro zone bonds.

Germany's 10-year bond yield - the bloc's benchmark - held at 0.25 percent, close to a one-month low of 0.24 percent reached on Tuesday. It remains far from the 14-month high of 0.51 percent reached in mid-March.

Most other euro zone yields were flat to slightly lower, though Ireland was a notable outperformer, the yield on its 10-year government bond dropping 4 basis points to a one-month low of 0.94 percent.

The yield on France's 10-year government bond dropped 2.2 bps, adding to Wednesday's 2.5 bps fall on easing concerns over the outcome of next month's presidential election runoff.

Money market pricing suggests investors see less than a 20 percent chance the ECB will raise rates at the end of this year, down from as much as 70 percent at the end of last month .

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

Editing by Andrew Bolton and John Stonestreet

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