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Euro zone yields fall as markets factor in "data-dependent" Fed hikes
December 17, 2015 / 8:54 AM / 2 years ago

Euro zone yields fall as markets factor in "data-dependent" Fed hikes

(Updates throughout)

By Marius Zaharia

LONDON, Dec 17 (Reuters) - Euro zone bond yields fell sharply on Thursday, with investors encouraged by the Federal Reserve’s commitment to gradual and data-dependent monetary policy tightening after its first interest rate hike in nearly a decade.

There was no immediate reaction in money markets or short-term bond yields, suggesting investors do not see the Fed move altering the outlook for the European Central Bank, which should be pleased with the weaker euro.

The U.S. central bank made clear after the long-awaited policy move that in deciding its next step it would put a premium on monitoring inflation, which remains below target.

Fed policymakers’ median projected target interest rate for 2016 remained 1.375 percent, implying four quarter-point hikes next year.

German 10-year Bund yields were 6 basis points lower at 0.61 percent, while their U.S. counterparts fell 5 bps to 2.24 percent. Most other euro zone bond yields were 5-6 basis points lower.

“With concerns around the health of the global economy firmly in place, the Fed has managed to deliver a very neutral start to the hiking cycle,” Lombard Odier Investment Managers’ global strategist, Salman Ahmed, said.

“Most importantly, (Fed chair Janet Yellen) managed to convince her diverse audience that policy will remain easy and any hiking from here on will be gradual and data-dependent.”

The iTraxx Europe index, which is derived from the credit default spreads of 125 investment grade companies, was 1.8 percent lower, reflecting increased risk appetite.

The iTraxx Crossover, based on the CDS of 75 of the most liquid sub-investment grade companies, was down 2.4 percent.

ECB SEEN ON HOLD

Euro zone money market rates implied the same 40-50 percent chance of a further 10 basis point cut in the ECB’s deposit rate in the coming year as before the Fed meeting. No immediate moves were foreseen.

Analysts say for now the ECB would be satisfied with the weaker euro, which fell 0.5 percent against the dollar, as well as with the lower bond yields.

Two weeks ago, the ECB cut the rate it offers banks for overnight deposits to minus 0.30 percent and extended its 60 billion euros a month asset purchase programme by six months until March 2017.

The moves fell short of market expectations but as oil prices collapsed to their lowest levels since the global financial crisis, inflation expectations resumed falling and bets for further monetary easing reappeared.

Similar worries are fuelling doubts about a fast-paced tightening in the United States.

“A meaningful hike cycle lacks credibility and we like long-end rate levels,” Citi strategists said in a note.

Spain will sell paper due 2020, 2023 and 2040 at its last bond auction of the year, which comes days before its general election - a four-party race in which the ruling party is expected to lose its majority in parliament. (Reporting by Marius Zaharia, editing by Nigel Stephenson and John Stonestreet)

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