Euro zone bond yields hold steady ahead of central bank decisions

By Harry Robertson

LONDON, Sept 20 (Reuters) – Euro zone bond yields were little changed on Wednesday as investors looked ahead to the Federal Reserve’s interest rate decision later in the day.

The Bank of England then sets interest rates on Thursday, followed by the Bank of Japan on Friday. They come after the European Central Bank hiked rates by 25 basis points (bps) to 4% last week and signalled that it had probably finished tightening.

Germany’s 10-year government bond yield was last down less than 1 bp to 2.732% on Wednesday. The yield, which moves inversely to the price, touched 2.751% on Tuesday, the highest since early March.

“I think the move this morning is primarily a breather or minor pre-Fed correction or adjustment following the increase seen in yields over the past few days,” said Jussi Hiljanen, head of European rates strategy at lender SEB.

The German 2-year bond yield, which is sensitive to changes in interest rate expectations, was also down 1 bp at 3.276%.

Data on Wednesday showed that German producer prices posted their biggest year-on-year decline in August since data collection began in 1949. They dropped 12.6%, in the latest sign of the malaise in the German economy.

Separate data showed British inflation unexpectedly cooled to 6.7% in August from 6.8% in July, casting some doubt on whether the Bank of England will raise borrowing costs on Thursday.

Later on Wednesday, investors expect the Federal Reserve to keep rates on hold at 5.25% to 5.5%, but leave the door open for a future interest rate hike if needed. They will scrutinise the so-called dot plot of policymakers’ rate expectations for hints about when interest rate cuts might be coming.

Italy’s 10-year bond yield was last down 2 bps to 4.504%. That took the closely watched gap between German and Italian 10-year yields to 176 bps, roughly flat on the day but below Monday’s more than three month high of 180.9 bps.

The ECB will next set interest rates in late October. Investors think there’s a 90% chance that borrowing costs will stay at 4% and just a 10% chance they’ll rise to 4.25%, according to pricing in derivatives markets on Wednesday.

(Reporting by Harry Robertson Editing by Gareth Jones)