Germany's short-dated government bond yields dipped to a six-week low on Thursday as investors suspected a softening in the Federal Reserve's stance on inflation that could encourage the U. S. central bank to keep interest rates lower for longer.
Germany's short-dated government bond yields dipped to a six-week low on Thursday as investors suspected a softening in the Federal Reserve's stance on inflation that could encourage the U.S. central bank to keep interest rates lower for longer.
The Fed left rates unchanged on Wednesday and said it expected to start winding down its massive holdings of bonds "relatively soon".
It noted that both overall inflation and a measure of underlying price gains had declined - trends which have worried some policymakers - but said it expected the economy to continue strengthening.
Investors seized on those inflation comments as a sign that the Fed is unlikely to rush into another rate rise too soon, snapping up bonds and stocks.
Markets are pricing in a 50 percent chance that the Fed will raise rates at its December meeting, down from 52 percent before Wednesday's policy statement, according to the CME Group's FedWatch Tool.
"There were few material changes to the FOMC statement published last night but these changes reinforced the impression that the Fed is increasingly concerned about weakening inflation dynamics," said Mizuho rates strategist Antoine Bouvet.
Across the euro zone, 10-year government bond yields were down 2-3 basis points on the day.
In Germany, the bloc's benchmark bond issuer, two-year bond yields dipped to minus 0.67 percent -- their lowest level in six weeks.
"Markets have become more relaxed about the chances of a year-end rate hike from the Fed, so that should give all bonds, especially short-dated, safe-haven ones support," said Rainer Guntermann, a strategist at Commerzbank.
He added that short-dated bond yields in Germany continued to face downward pressure from heavy buying for European Central Bank monetary stimulus. Because of a shortage of eligible debt for the scheme, bond buying in Germany this year has been focused on shorter-dated maturities.
A perception that the ECB is unlikely to rush into unwinding its massive stimulus given subdued inflation has also brought some relief to bond markets, which have been rattled in the past month by the prospect of a "tapering" of the scheme.
The ECB could reduce asset purchases from the start of next year but should not completely stop bond buys, Austrian central bank governor Ewald Nowotny said late on Wednesday, adding that policymakers needs a flexible, careful plan.
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
(This article has not been edited by DNA's editorial team and is auto-generated from an agency feed.)
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