Euro zone bond yields fall as Fed rolls out new strategy

Credit: REUTERS/LEONHARD FOEGER

Euro zone bond yields fell on Thursday after the U.S. Federal Reserve unveiled an aggressive new strategy to restore the United States to full employment and lift inflation back to healthier levels.

By Dhara Ranasinghe

LONDON, Aug 27 (Reuters) - Euro zone bond yields fell on Thursday after the U.S. Federal Reserve unveiled an aggressive new strategy to restore the United States to full employment and lift inflation back to healthier levels.

Under the new approach, outlined by Fed Chair Jerome Powell in a prepared speech for the Jackson Hole symposium, the Fed said it will seek to achieve inflation averaging 2% over time, offsetting below-2% periods with higher inflation "for some time", and to ensure employment does not fall short of its maximum level.

U.S. Treasury yields initially fell following the comments, dragging down borrowing costs in Europe.

Borrowing costs in the euro area, which had fallen ahead of Powell's speech, briefly extended their falls.

Germany's benchmark 10-year Bund yield briefly hit a session low at -0.47% before pulling back to around -0.43%, down about 3 basis points on the day DE10YT=RR.

Italian bond yields were also lower, with 10-year yields down around 3 bps at 1.06% IT10YT=RR and below this week's thee-week highs.

"There was little to surprise the market except perhaps from Powell saying explicitly the Fed will allow for job gains without assuming it will lead to inflation, and being more specific on the outcome of the review than he could have been," said Antoine Bouvet, senior rates strategist at ING.

"I think the market reaction had more to do with positioning into the speech: we might have seen some residual supply-related short covering after the speech and from those positioning for a speech light on specifics."

A pick up in new bond issuance in the euro area has contributed to a selloff in bonds this week but with supply pressures abating on Thursday, yields had edged back down.

European Central Bank chief economist Philip Lane is also scheduled to speak later in the session. His comments are likely to be followed closely before the ECB's September meeting.

(Reporting by Dhara Ranasinghe; editing by Simon Jessop and Giles Elgood)

((Dhara.Ranasinghe@thomsonreuters.com; +442075422684;))

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