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UPDATE 2-Euro zone yields dip after dovish ECB talk and ahead of Fed

* Euro zone bond yields edge lower in quiet trade

* Investors prepare for two-day Fed policy meeting

* Analysts expect Fed will sound more dovish than ECB

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds analyst quotes, latest prices)

LONDON, Sept 14 (Reuters) - Euro zone bond yields edged lower on Monday, with the benchmark German yield hitting -0.5% as traders digested last week’s dovish tone from European Central Bank policymakers and looked towards the Federal Reserve’s two-day policy meeting.

A more positive mood across equity markets on Monday - largely on the back of renewed hopes for a COVID-19 vaccine - did not stir euro zone debt markets, with moves in yields small and many investors cautious about taking new positions before the Fed’s policy meeting which concludes on Wednesday.

Euro zone yields had fallen at the end of last week after ECB chief economist Philip Lane and French central bank chief Francois Villeroy de Galhau highlighted risks from a strong currency, noting it clearly mattered for policy because it curbed price pressures.

That was after the ECB had taken an unexpectedly relaxed stance on growth and inflation at its regular policy meeting.

This week is another busy period for central bank meetings, with Bank of Japan and Bank of England policymakers meeting in addition to the Fed.

Peter Chatwell, a strategist at Mizuho Bank, said he expected both the BoE and the Fed to “outdove” the ECB.

“Both of those central banks are going to be more dovish than the ECB,” he said, adding that for now the ECB could take stock.

But Chatwell expects the ECB to increase its asset purchases by December and then move to cut interest rates around June next year - he is forecasting German bund yields will drop to -0.7% by end-year as traders price in further stimulus.

On Monday the 10-year German yield fell 2 basis points to the day’s low of -0.502% and was last at -0.486%.

The 2-year yield was 1 bp lower at -0.699%.

Unicredit analysts are also expecting more ECB stimulus.

“Although both EGB (Eurozone Government Bond) yields and spreads to (German) Bunds have returned to their pre-pandemic levels ... the information we get looking at breakeven inflation rates confirms that action by the ECB is still needed in order to revive investor inflation expectations,” they wrote.

The analysts noted that while the 10-year German Bund yield was at the same levels it was in late February, before the pandemic roiled markets, the 10-year breakeven inflation rate was 10 basis points lower.

Other core euro zone bond yields nudged lower on Monday too, with the French 10-year yield 2 bps lower at -0.2059% .

The Italian 10-year yield dropped 3 bps to below 1% for the first time since Sept 3.

Editing by Kirsten Donovan/Ed Osmond/Pravin Char

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