UPDATE 2-Euro zone bond yields push up after U.S. data, focus on new ECB chief

Eurozone government bond yields pushed higher on Friday as the market took positive signs from U.S. data releases and Christine Lagarde began her presidency of the European Central Bank.

Positive U.S. data readings eased demand for safe-haven government bonds after a U.S. interest rate cut and renewed concern about U.S.-China trade talks boosted bond markets earlier this week and eurozone yields had fallen after in October recording their biggest monthly rise since early 2018. U.S. domestic job growth slowed less than expected in October, while the manufacturing sector contracted for a third straight month but at a slower pace than the previous month.

The data came after the U.S. Federal Reserve cut interest rates on Wednesday for the third time this year, but dropped a reference in its policy statement to acting "as appropriate" to sustain economic expansion. This made analysts see the policy decision as a hawkish cut. The positive data helped offset the impact from the Fed decision, concerns about U.S.-China relations and month-end pressures, said TD Securities rates strategist Pooja Kumra.

The next risk for the market is how the U.S.-China deadlock continues and the UK election in December, she added. Most 10-year bond yields in the bloc rose around two basis points on the day after striking two-week lows on Thursday.

They followed U.S. Treasuries, which also sold off following the data releases. Germany's 10-year Bund yield was at -0.38%,, off Thursday's low of -0.42%.

ASSET PURCHASES Analysts said the resumption of ECB asset purchases this week also helped euro zone bonds, with focus turning to the policy outlook under Christine Lagarde, whose eight-year term began on Friday.

Creating the broadest possible consensus and making sure the ECB speaks with one voice should be Lagarde's top priorities, current and former policymakers told Reuters. The decision to resume asset purchases has divided the central bank and fuelled a perception in markets that the bar to further monetary easing is high.

Having discounted an ECB depo rate of close to -0.8% just a couple of months ago, the market no longer discounts another cut of 10 basis points in 2020. "It's pretty clear that Lagarde has an uphill task in trying to promote the unity that leads to a coherent set of policies going forward," said Philip Shaw, chief economist at Investec. "Her own views can be characterized as continuity (with former ECB chief Mario Draghi)".

Lagarde will initially keep her predecessor's top aides, including his personal adviser, two sources close to the matter told Reuters on Thursday. "At the margin (this) might be a positive given policy continuity, although it might depend on what you think of current policies," Jim Reid, a strategist at Deutsche Bank, said in a note.

Lagarde will make her first public speech as ECB chief on Monday. Meanwhile, the big rise in yields last month meant the pool of negative-yielding eurozone government bonds on its platform shrank in October for the first time since April, data from Tradeweb showed.

 

Also Read: First day on the job for ECB chief Christine Lagarde

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