Euro zone bonds dip ahead of pre-election Fed meeting

Euro zone government bond yields dipped slightly ahead of a U.S. Federal Reserve meeting at which market participants expect the world's most influential policymakers to remain cautious on the economy ahead of the U.S. presidential election.

Euro zone government bond yields dipped slightly ahead of a U.S. Federal Reserve meeting at which market participants expect the world's most influential policymakers to remain cautious on the economy ahead of the U.S. presidential election. The Federal Reserve is expected to wrap up its latest policy meeting on Wednesday with somewhat rosier economic forecasts but a renewed pledge to keep interest rates low for as long as the world's biggest economy needs to recover from its deepest downturn in decades.

This should keep downward pressure on global government bond yields as the world's largest central bank keeps the stimulus taps on, though a further rally is unlikely, analysts said. "The street has priced out rate hikes to 2025, and when coupled with the fact the Fed has already ruled out the possibility of negative interest rates, it will be difficult, if not next to impossible, for the FOMC to over-deliver on the dovish side tonight," said Stephen Innes, a strategist at AxiCorp.

Euro zone bond yields dipped slightly across the board, with Germany's 10-year government bond yield, the benchmark for the bloc, dropping a basis point to -0.49%. U.S. Treasury yields were also slightly lower on the day, with 10-year borrowing costs edging down to 0.674%.

Analysts will also be keeping a ear out for any further detail on the central bank's shift to a more flexible position on inflation. Charalambos Pissouros, an analyst at JFD Group, said updated economic projections will give the market an an idea of how much of an inflation overshoot the Fed is willing to tolerate before they start considering raising rates.

In Europe, Germany is set to sell 30-year Bunds in an auction at a time when demand for government debt remains powerful, fuelled by European Central Bank stimulus. A number of ECB officials are due to speak later in the session, let by ECB Chief Economist Philip Lane.