Bund yields grind lower as Fed's Yellen takes ‘cautious’ stance

LONDON: German 10-year Bund yields slipped closer to their record lows on Wednesday after Federal Reserve Chair Janet Yellen said the U.S. central bank should proceed "cautiously" in raising interest rates.

Her comments contrasted with those of some top Fed officials who in recent days said the U.S. economy was strong enough to warrant further rate hikes despite uncertainty about Chinese growth and turmoil in the oil market.

Yellen's stance adds to pressure on the European Central Bank, whose struggle to lift inflation becomes harder when the euro strengthens. The single currency hit its highest in almost two weeks against the dollar after the comments.

German 10-year Bund yields, the benchmark for euro zone borrowing costs, fell 2 basis points to 0.127 percent, within a whisker of this year's low of 0.102 percent and an all-time low of 0.05 percent hit last year.

"Fed Chairwoman Yellen sounded very dovish and discounted the recent hawkish rhetoric by some Fed governors and that triggered some repositioning in rates markets," said KBC rates strategist Mathias van der Jeugt.

"Pressure will definitely be on the ECB ... they obviously don't like a strong single currency especially given all their efforts to ease monetary policy."

Money markets attach a probability of about 70 percent to another rate cut in Europe this year, unchanged from before Yellen's speech.

But long-term inflation expectations as indicated by five-year, five-year breakeven forwards, fell to their lowest in almost a month. The measure, which shows where markets see 2026 inflation forecasts in 2021, traded just below 1.42 percent, just above record lows of 1.36 percent hit in February.

Inflation expectations have fallen despite the ECB cutting interest rates and increasing the pace of asset purchases earlier this month.

Germany is due to publish March inflation data later in the day, while the figures for the whole euro zone will be published on Thursday.

Italy plans to auction 3.0-3.5 billion euros of new five-year bonds, 2.5-3.0 billion euros of 10-year bonds and 1.0-1.5 billion euros of floating-rate CCTeu certificates maturing in 2022. Germany sells up to 4 billion of five-year bonds.

Most euro zone bond yields were 1-2 basis points lower.