LONDON: Euro zone government bond yields fell across the board on Thursday after published remarks from policymakers in both Europe and the United States suggested they were cautious about withdrawing monetary stimulus too quickly.
European Central Bank policymakers worried about a possible overshoot in the euro when they met on July 20, minutes of the meeting showed on Thursday. They warned that easy financing conditions "could not be taken for granted" and depended on the ECB's easy policy,
The euro dropped to a three-week low of $1.1662, and euro zone bond yields dipped 1-2 basis points across the board.
Portugal -- which has been a major beneficiary of ECB stimulus -- saw its 10-year borrowing costs drop to their lowest level in more than a year, down 6.5 bps to 2.76 percent.
"We have seen the periphery outperform today on this cautious note from policymakers," said Mizuho strategist Peter Chatwell.
Yields were already under downward pressure when details of the US Fed July meeting, released late on Wednesday, showed concerns that soft inflation data may cool the pace of monetary tightening in the world's largest economy.
The Fed has raised its benchmark overnight lending rate twice this year and forecasts one more rise before the end of 2017. But money market pricing suggests investors see less than a 50 percent chance of a hike by December.
"Fed communications are cementing expectations of a very gradual approach to monetary tightening," Chatwell said.
Central bankers are set to meet next week in an annual gathering of policymakers at Jackson Hole, Wyoming, though Reuters reported on Wednesday that ECB head Mario Draghi will not deliver a new policy message at the conference.
Signs of central bank caution came as President Donald Trump dissolved two business advisory groups, sowing further doubts over his ability to deliver growth-boosting spending plans he promised when elected.
US 10-year yields, which had climbed to one-week peaks earlier on Wednesday, edged lower on Thursday to 2.22 percent having fallen 4 bps the day before after the publication of the Fed minutes.
In an interview with Reuters on Wednesday, Cleveland Fed President Loretta Mester staked out the hawkish argument for carrying on with US interest rate hikes even while weak inflation has split opinions among her colleagues.
She said that while some price readings have fallen this year, expectations are more stable, and that policy must anticipate changes in the data and not react to temporary aberrations.
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