LONDON: Euro zone government bond yields fell on Thursday, testing record lows in several cases, after the US Federal Reserve opened the door to interest rate cuts.
The Fed said on Wednesday night the case is building for rate cuts this year, possibly as early as next month, as both global and domestic economic risks grow.
"This Fed meeting very much brings a global currency war into our central scenario. It becomes a race to the bottom for global rates markets, a race to the bottom for FX," said Mizuho's head of rates Peter Chatwell.
"The response from the ECB will be on the aggressive side, and other central banks who are already in the race to start with will have to step it up."
US Treasury yields dropped to some of their lowest levels in years on the news. Ten-year yields fell below 2pc for the first time since November 2016.
Euro zone government bond yields followed suit, with Germany's 10-year government bond yield, the benchmark for the bloc, down 2 basis points at -0.31pc, having tested this week's record low of -0.329pc..
Major government bond yields tend to track each other, since many investors switch between them. In addition, US policy easing has a global impact on market prices.
The rally ran right through the euro zone bond market, with other 10-year yields 2 to 8 bps lower on the day. Spain's 10-year yield reached a record low 0.36pc, down 4.5 bps on the day.
Italy's bond market turned around in late trade after its treasury announced a bond exchange. Italian 10-year bond yields were last up around one basis point having been as much as 8 to 11 bps lower across the curve.
"From an issuance perspective it is net flat, with a tiny bit of duration going into the market, but the market has moved a long way so people may be looking for an excuse to close out," said Lyn Graham Taylor, rates strategist at Rabobank.
Italy's Treasury said on Thursday it would offer up to 2.5 billion euros ($2.8 billion) of the 2.0pc February 2028 BTP bond in an exchange auction on Friday.
The news from the United States follows a similar message from European Central Bank President Mario Draghi, who this week opened the door to rate cuts and the potential reopening of asset purchases.
The Australian, New Zealand, Indian and Russian central banks have also cut rates recently.
"In Europe there was some evidence of dovish ECB messages being taken off yesterday just in case the Fed was more hawkish.
Well, the Fed certainly wasn't hawkish, so we may well see some of those dovish ECB positions get put back on with more conviction," Chatwell said.
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