Euro zone bond yields inch down ahead of Fed policy meeting
Euro zone government bonds dipped slightly on Wednesday, as traders awaited the Federal Reserve's policy meeting later in the day, its first since U.S. President Donald Trump's early April tariff announcement rattled financial markets.
Germany's 10-year bond yield, the euro area's benchmark, slid 2 basis point to 2.51%, down from three-week highs touched on Tuesday.
German politics was in focus a day after conservative leader Friedrich Merz was elected chancellor by parliament in a second round of voting following an unprecedented defeat in the first attempt, which got his coalition government off to a wobbly start.
Investors are closely watching Merz's policy plans. His early March announcement of a historic change to Germany's debt brake and a massive spending programme sent Germany's 10-year yield up above 2.9% before it retreated in April on safe-haven flows following Trump's tariff plans.
The focus is now shifting to how soon Germany can ramp up spending and borrowing.
Nabil Milali, a strategist at Edmond de Rothschild Asset Management, said there were doubts around the ability of this coalition to put in place fiscal measures in 2025, with the majority of the spending most likely to happen in 2026.
"And so for the bond market, in the short term, it's not a game changer in terms of supply. It's not a game changer in terms of growth for Germany," Milali said.
Also important for bond markets was Wednesday's Fed rate decision which comes against a backdrop of concern about the outlook for the U.S. economy given heightened trade uncertainty.
Chair Jerome Powell has also said he thinks Trump's tariffs would be inflationary, further complicating policy making, and leaving them in wait and see mode until economic data can indicate the scale of the impact on growth or inflation.
As a result, market pricing reflects expectations the Fed keeps rates unchanged on Wednesday but cuts later this year . Any hints about the timing of those cuts could move bond markets in the U.S. as well as around the world.
The Bank of England, the Riksbank and Norges Bank meet on Thursday.
Italy's 10-year yield was down 4 basis point at 3.60%, leaving the spread between it and Germany's Bund yield at 106 basis points.
(Reporting by Linda Pasquini; editing by Dhara Ranasinghe, Andrew Heavens and Ed Osmond)
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