Brexit delay possibility helps Euro zone bond yields to rise

Core euro zone bond yields edged off 1-1/2 week highs hit earlier this week on Wednesday as the market waited for further clarity on the direction of U.S. rates and analysts struggled to make sense of the UK's Brexit negotiations. After the European Central Bank acknowledged slowing growth while unveiling a new cheap loan stimulus programme earlier this month, markets are waiting to find out what "patient" (U.S. Fed Chair) Jerome Powell does next.

Market pricing suggests the next move by the U.S. Federal Reserve will be a rate cut, likely in 2020, though most analysts expect one more hike this year, likely in June. "In our view, the market is not anticipating the extent of hawkishness that we expect from the Fed at today's meeting," wrote Mizuho rates strategists in a note. "

"The Fed's time in the dovish camp has led to an easing in financial conditions, and seen a strengthening labour market." The U.S. Federal Reserve on Wednesday is expected to hold interest rates steady, shave the number of hikes projected for the rest of the year and release long-awaited details of a plan to end the monthly reduction of its massive balance sheet.

Ten-year U.S. Treasury yields dipped a basis point in European trade and were last seen at 2.60 per cent.

THE LONG AND SHORT OF IT

The UK's Brexit negotiations also have the capacity to move markets, though rates strategists were unsure "in which direction". Prime Minister Theresa May will request a short delay to Brexit on Wednesday after her failure to get a divorce deal ratified left the United Kingdom's divorce from the European Union in turmoil.

The European Union has done a lot to accommodate Britain over Brexit and can go no further, European Commission head Jean-Claude Juncker said on Wednesday, as he played down hopes of a breakthrough at this week's EU summit. Core eurozone rates held firm with Germany's 10-year government bond trading around a yield of 0.10 per cent.

The most liquid benchmark in the bloc touched a high of 0.124 per cent on Tuesday, after expectations of a delay to Brexit and rumours that any new round of ECB quantitative easing would be expanded to include equities. The move was the bund's biggest one-day rise in almost three weeks. The French economy should grow about 1.4 per cent this year, Finance Minister Bruno Le Maire said, revising down the forecast of 1.7 per cent growth in this year's budget.

French 10-year government bond yields were up half a basis point to 0.4778 per cent. Elsewhere peripheral bond yields were marginally higher,.

On the supply side, Germany will reopen its five years April 2024 bond to raise 4 billion euros of bonds.