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UPDATE 2-Euro zone bonds settle as Fed clues mute German blues
September 26, 2017 / 10:34 AM / 3 months ago

UPDATE 2-Euro zone bonds settle as Fed clues mute German blues

* Yields inch up after biggest drop in seven-weeks

* Investors shrug of latest Korean war of words

* Yellen scheduled to speak at 1645 GMT

* Macron lays out vision for Europe

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds Macron speech)

By John Geddie

LONDON, Sept 26 (Reuters) - Europe’s benchmark bond yield steadied on Tuesday after its biggest daily drop in seven weeks as investors waited for a Federal Reserve speech that may flesh out plans to tighten U.S. monetary conditions.

The yield on Germany’s 10-year bond, seen as a safe store of cash in times of stress, slid six basis points on Monday after an unexpectedly weak election result for Angela Merkel and after North Korea accused the United States of declaring war.

When European trading began on Tuesday, Germany’s yield edged up slightly as analysts said a speech from Fed chair Janet Yellen due at 1645 GMT swept into focus.

Investors will be parsing her words, and those of other Fed officials due to speak on Tuesday, for clues on whether the U.S. central bank will stick to plans to raise interest rates in December.

“Investors are not fully up to speed with the risk of hawkish signals from Fed officials,” Mizuho strategist Antoine Bouvet said.

“The Fed is back in a situation where it would want to show optimism at the very least, and the market should be pricing in more hikes in the coming months and quarters than it is currently.”

According to CME’s FedWatch tool, money markets point to a 70 percent chance of a hike in December but only a 20 percent chance of a further hike in March 2018.

Analysts said a rise in oil to a 26-month high, which bolsters inflation, and a sale of two-year German debt also kept upward pressure on yields.

SHORT-LIVED

Yet again, the market’s reaction to the latest escalation in tension between North Korea and the U.S. proved short-lived.

Yields on U.S. Treasuries and German Bunds fell to a day’s low when North Korean Foreign Minister Ri Yong Ho said on Monday Twitter comments from U.S. President Donald Trump amounted to a declaration of war.

Both traded back up on Tuesday in what analysts say reflects a widespread belief that diplomacy will prevail.

In late Tuesday trade, German 10-year yields rose around 1.5 basis points to 0.41 percent, off an 11-day low of 0.395 percent hit on Monday. All other euro zone bond yields were also a touch higher.

French President Emmanuel Macron offered a sweeping vision for a renewal of Europe, calling for the EU to cooperate more closely on defence, immigration, tax and social policy, and for the single currency bloc to have its own budget.

The speech had been in focus after Germany’s election result was seen weakening steps towards further euro zone integration.

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 Janet Lawrence

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