European Bonds Rally as Fed Emphasizes Gradual Rate Trajectory

  • Fed increases interest rates while underscoring global risks
  • Bonds rise as faltering oil prices weigh on inflation outlook

European government bonds climbed on Thursday after the Federal Reserve moved away from its record-low interest rates while cautioning that global risks and falling oil prices could keep the pace of further policy tightening slow.

Yields on 10-year sovereign securities from Germany to Spain headed for their biggest declines in more than a week. The Fed increased interest rates for the first time since 2006, lifting the range by 25 basis points to 0.25-0.5 percent on Wednesday. Fed Chair Janet Yellen said the U.S. economy was performing well but transitory forces such as the fall in oil prices were weighing on inflationary pressures. West Texas Intermediate crude approached its lowest price since February 2009.

“Yellen said the projections were very much based on the assumption of stable oil prices,” said Daniel Lenz, lead market strategist at DZ Bank AG in Frankfurt. “Given that today oil prices are dropping further, with a sharp downward trend due in December, markets interpret this as a further signal” rate increases will be measured, he said.

European bonds will benefit in the short term “because the news was on the risks to the downside, especially for the inflation outlook,” Lenz said.

Benchmark German 10-year bund yields dropped eight basis points, or 0.08 percentage point, to 0.60 percent as of 10:51 a.m. London time, set for the steepest daily decline since Dec. 7. The 1 percent bond due in August 2025 rose 0.77, or 7.70 euros per 1,000-euro ($1,085) face amount, to 103.77.

Yields on similar-maturity French bonds fell eight basis points to 0.93 percent, while those on Spanish 10-year securities declined five basis points to 1.71 percent.

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