July 14, 2017 / 7:50 AM / 4 months ago

Fed's patience takes sting out of euro zone bond rout

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By John Geddie

LONDON, July 14 (Reuters) - Euro zone bond yields fell on Friday, taking their cue from the patient approach of top U.S. policymakers on interest rate hikes ahead of inflation data in the world’s largest economy.

The centrist Dallas Fed President Robert Kaplan advocated late on Thursday a go-slow approach on further hikes which chimed with Fed chair Janet Yellen’s comments that the central bank rate would not go “all that much further”.

These cautious comments have taken the sting out of a sell-off in the bloc’s bond market that has been gathering steam over the past few weeks on rising expectations that the European Central Bank is set to wind down its asset purchase programme.

A Reuters poll of economists released on Friday showed that the ECB is likely to wait until September before announcing a shift away from its ultra-easy policy, while a move at the July meeting next week is seen as too close to call.

“They (Fed comments) add to our conviction that no further Fed hike should be expected for the rest of the year, which should prove reassuring for markets concerned about excessive tightening risk globally,” Mizuho’s head of euro rates strategy Peter Chatwell said.

Money markets pricing suggests less than a 50 percent chance of a hike over the next year, according to CME’s FedWatch tool.

The fall in euro zone yields tracked a move lower in U.S. equivalents which came after Kaplan - who is usually fairly centre-ground on monetary policy - made his comments late on Thursday.

Doves and Hawks: A look at where U.S. Fed officials stand on interest rate hikes here

The bloc’s benchmark German 10-year yield fell some 3 basis points when European trading started on Friday to 0.50 percent, moving away from an 18-month high hit earlier this week of 0.583 percent.

All other euro zone yields were down around 3 bps on the day.

The final major event of the week for investors is U.S. inflation data due to be released later on Friday, although expectations remain muted.

The core consumer price index (CPI) is forecast to have risen only 1.7 percent year-on-year in June after a similar gain in May. On a month-on-month basis, the core CPI is expected to rise 0.2 percent after a 0.1 percent gain the previous 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

Reporting by John Geddie; Editing by Alison Williams

Our Standards:The Thomson Reuters Trust Principles.
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