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UPDATE 2-No Fed dread in bond markets with yields hitting multi-week lows
June 14, 2017 / 10:23 AM / 2 months ago

UPDATE 2-No Fed dread in bond markets with yields hitting multi-week lows

* German, French and Spanish yields hit fresh lows

* U.S. Treasury yields hit fresh seven-month trough

* Fed widely expected to raise rates

* But weak growth, inflation expected to feed caution

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds U.S. CPI data, updates prices)

By John Geddie

LONDON, June 14 (Reuters) - Europe's benchmark bond yield hit a fresh seven-week low as analysts said weak growth and inflation may encourage the U.S. central bank to adopt a cautious tone after a widely expected rate hike at its meeting on Wednesday.

Germany's 10-year yield and most other euro zone equivalents dropped on Wednesday, tracking U.S. Treasury yields that fell sharply after below-forecast inflation and retail sales data reduced expectations that the Federal Reserve would raise interest rates in the second half of the year.

Markets have fully priced the prospect of the Fed raising its benchmark rate to a target range of 1.00 to 1.25 percent, but investors are waiting for any signals on the future path of rates or details on plans to shrink its massive balance sheet.

Following a lacklustre first quarter for economic growth and a retreat in headline inflation to 1.5 percent from 1.8 percent earlier in 2017, there is doubt over whether policymakers can stick to their anticipated pace of tightening of three interest rate rises this year and next.

There are also growing doubts on the size and scope of fiscal stimulus the Trump administration may inject into the U.S. economy with campaign promises on tax reform, financial regulation rollbacks and infrastructure spending either still on the drawing board or facing hurdles in Congress.

"There is a very large probability of the U.S. ... ratcheting up the fed funds target range," DZ Bank's Hendrik Lodde said.

"It should therefore be more intriguing to see ... whether it is still planning on implementing one further tightening step in the present year ... Doubts on this score have surfaced of late."

Few economists polled by Reuters expect major changes in the Fed's quarterly projections for growth, unemployment and inflation which it will also release on Wednesday.

Investors will also be looking for a clearer steer on the timing and details of its previously announced plan to reduce this year its $4.2 trillion portfolio of Treasury debt and mortgage-backed securities, most of which were purchased in the wake of the financial crisis to help bolster the economy.

German 10-year yields fell 4 basis points to 0.23 percent on Wednesday, its lowest level for over seven weeks, while French and Spanish equivalents hit multi-month lows.

The yield on 10-year U.S. Treasuries was down as much as 10 basis points to 2.10 percent, the lowest level since November 10, the day after the U.S. election.

The gap between the two benchmarks edged away from a one-month wide point of 197 basis points hit in the wake of a European Central Bank meeting last week in which policymakers pledged to maintain ultra-easy policy as inflation remained weak.

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 Alison Williams

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