Euro zone bonds hit three-month lows as Fed fever grips

LONDON: Major euro zone government borrowing costs dipped to their lowest level in three months on Thursday, following U.S. Treasury yields lower, on comments that many investors saw as a sign the U.S. Fed's tightening cycle was drawing to a close.

Fed Chair Jerome Powell said on Wednesday that the policy rate is now "just below" estimates of a level that neither brakes nor boosts a healthy economy.

"For me Powell's comments are not really a dovish turn, but more like a message for the financial market that the Fed is watching how the economy is evolving," said DZ Bank analyst Rene Albrecht.

"But it is a signal they are not a pre-set course to hiking rates, so the market is reacting to that," he said.

Powell's comments triggered a rally in U.S. stocks and pushed the U.S. Treasury 10-year bond yield to as low as 2.997 percent, its lowest level since mid-September and well away from this month's high of 3.25 percent.

The spread between 2-year and 10-year yields fell to 22 basis points, close to an 11-year low of 19 bps hit in late August.

Euro zone government bond yields followed for the most part, with German 10-year yields hitting a three-month low of 0.321 percent, down 3 basis points on the day.

French and Dutch government bond yields also dipped to their lowest in three-months at 0.695 percent and 0.453 percent respectively, down about 2 bps each on the day. . French 10-year bonds were on track for their biggest one day fall in two-months.

The yields of major government bond markets tend to track each other as many investors switch between them. They are also affected by the actions of the Fed, widely considered the most powerful central bank in the world.

German inflation data came in above the ECB target for November, data showed on Thursday. German consumer prices rose 2.2 percent year-on-year, versus 2.4 percent a month  earlier. The ECB targets inflation of close to but below 2 percent for the single-currency bloc as a whole.

ITALY BUOYANT

Italy's government bond yields also dipped on Thursday, helped by an auction of five-year and 10-year bonds which was better received than last week's BTP Italia deal targeted at retail investors.

Italy's five year government bonds were last down seven basis points to 2.33 percent, while its 10-year bonds reached lows of 3.21 percent,.

Last week's deal may have prompted Italian politicians to make compromising noises this week on budget talks with the European Commission.

In a boost for Italian banks, ECB supervisor Ignazio Angeloni said the banks have made "formidable" progress in cleaning up their balance sheets and raising their capital buffers.

Economy Minister Giovanni Tria said on Wednesday Italy is looking for ways to contain public spending while supporting flagging economic growth in a bid to head off disciplinary action by the European Commission.

Albrecht of DZ Bank said this changed tone, coupled with the still-high yields on Italian debt, should support Thursday's auction.

Greek bonds also benefited from the more positive mood in Itay, with the 10-year bond hitting a four-week low of 4.26 percent, down 7 bps on the day.