Euro zone bond yields fall as ‘patient’ Fed satisfies investors

LONDON: Euro zone bond yields fell on Thursday after the U.S. Federal Reserve struck a more cautious tone than many had expected as the world's largest economy mulls raising interest rates.

As predicted by many in the market, the Fed altered a pledge to keep rates near zero for a "considerable time" at the end of its two-day meeting on Wednesday.

But using less hawkish language than many had expected, it said it would now take a "patient" approach, which analysts said suggests it will take account of global growth worries and a slide in oil prices, especially after U.S. inflation recorded its biggest drop in six years in November.

"Investors are relieved that there was not more restrictive wording from the Fed. It will definitely stick to its path, but there seems to be more flexibility," said DZ strategist Daniel Lenz.

German 10-year bond yields -- the euro zone benchmark -- were a touch down at 0.59 percent, coming off earlier lows after German business morale rose in December, another sign that the bloc's largest economy could pick up in the fourth quarter.

But this chink of light in Europe's economic gloom did little to dampen expectations that further stimulus from the ECB early next year will be needed.

Benoit Coeure -- one of the central bank's top policymakers -- said late on Wednesday that the ECB was discussing how best to act to revive the euro zone rather than whether to do so, and that sovereign bond purchases were the "baseline option".

"If someone had any doubts the ECB will do QE these should have been dashed at the very latest yesterday by Coeure's speech," said Jan von Gerich, chief fixed income analyst at Nordea.

Higher-yielding debt in the bloc's southern periphery, which has the most potential to rally if such a scheme is announced, outperformed on Thursday.

Italian and Spanish 10-year yields fell 4 bps to 1.93 and 1.74 percent, respectively, while Portugal's dropped 8 bps to 2.81 percent.

Even Greek yields dipped 20 bps to 8.7 percent , despite the country's failure to elect a president at a first attempt by pariliament. If the government fails to achieve a majority in none of the three voting rounds, snap elections will likely be called.

But strategists said investors were focused on the third round on Dec. 29, when the government will require a smaller quorum to elect its candidate.

"The market understood that yesterday was just a staging post, and very few undecided MPs would vote 'yes' as their potential leverage increases as you move toward Dec. 29," said RBS rates strategist Michael Michaelides.