September 19, 2019 / 7:38 AM / a month ago

Euro zone bond yields inch up as Fed dashes hopes for more easing

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

By Dhara Ranasinghe

LONDON, Sept 19 (Reuters) - The euro zone’s government bond yields rose on Thursday, tracking U.S. yields, after the Federal Reserve delivered a widely expected interest rate cut but dashed hopes for further monetary easing.

In its second rate cut of the year, the Fed on Wednesday lowered its benchmark overnight lending rate by a quarter of a percentage point to a range of 1.75% to 2.00%.

But the central bank signalled a higher bar to further reductions in borrowing costs, pushing U.S. Treasury yields higher and flattening the bond yield curve.

That set the tone for European markets, and new supply from France and Spain later this session added to upward pressure on bond yields. The two countries are expected to sell about 15 billion euros of new supply.

Ten-year bond yields across the bloc were around 2 basis points higher on the day. Germany’s benchmark 10-year bond yield was up 2 bps at -0.49%, still holding below six-week highs set last week. Southern European bond yields, which fell on Wednesday, were also higher .

“The Fed underwhelmed expectations. They were cautious and said they are data-dependent, so the market concluded that this won’t lead to more rate cuts,” said Commerzbank rates strategist Rainer Guntermann. “You could say that the global easing push is losing steam. The Bank of Japan also kept policy unchanged today.”

The BOJ maintained its short-term interest rate target at -0.1% and a pledge to guide 10-year government bond yields around 0% under its yield curve control policy.

Since last week’s European Central Bank rate cut, both markets and analysts have scaled back expectations for another near-term move.

RBC Capital Markets said it has now expects the ECB to keep rates on hold for the foreseeable future instead of cutting again.

In a reaction to last week’s rate cut, the overnight EONIA rate was fixed at -0.457% late on Wednesday, 9.5 bps lower than the average of the last reserve period.

Analysts said they were also watching the allotment announcement later this session for the first tranche of the fresh round of cheap multi-year loans from the ECB, known as TLTRO III. (Reporting by Dhara Ranasinghe, editing by Larry King)

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