Euro zone yields near lows, U.S. data unlikely to clear Fed’s Brexit fog

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London | Published: July 8, 2016 2:45:19 PM

Euro zone yields fell near record lows on Friday ahead of U.S. jobs data seen as unlikely to shift the rate path for U.S policymakers still struggling to see through the fog of Brexit.

Investors have all but priced out the chances of a U.S. interest rate rise this year and even a solid print of payrolls data on Friday is seen as unlikely to change the picture. (Reuters)Investors have all but priced out the chances of a U.S. interest rate rise this year and even a solid print of payrolls data on Friday is seen as unlikely to change the picture. (Reuters)

Euro zone yields fell near record lows on Friday ahead of U.S. jobs data seen as unlikely to shift the rate path for U.S policymakers still struggling to see through the fog of Brexit.

Bond yields across the world have collapsed since Britain’s shock vote to leave the European Union last month delivered a blow to the outlook for global growth and upped the pressure on central banks to adopt easier monetary policy.

Investors have all but priced out the chances of a U.S. interest rate rise this year and even a solid print of payrolls data on Friday is seen as unlikely to change the picture.

In minutes of the Federal Reserve’s June meeting, released on Wednesday, policymakers explicitly tied consideration of further rate increases to “additional data on the consequences of the UK vote”.

Economists polled by Reuters anticipate Friday’s data due at 1230 GMT to show 175,000 new jobs created in June, a big jump from the 38,000 added in May.

“Readings are unlikely to derail the ongoing bull-run in Bunds prior to the weekend, unless a massive surprise to the upside (200k or higher) were to materialise,” Commerzbank strategist Markus Koch said.

German 10-year bond yields edged down to minus 0.17 percent , close to a minus 0.20 percent record low struck earlier this week.

U.S. equivalents were also a shade lower at 1.38 percent, just above a low of 1.32 percent. Both have fallen around 30-40 bps since the Brexit vote.

All other euro zone yields were lower on the day, with most in sight of record lows. Even Italian bonds, shaken by worries over its banks and fragile government over the last week, saw yields fall 2 bps to 1.16 percent.

Some analysts said yields, particularly in the United States, may have further room to fall if there is more weak payrolls data on top of the Brexit uncertainty.

“If we see another weak print then the risk-off mood that prevailed at the start of the week is likely to return with a vengeance,” said Rabobank in a note, adding that 10-year treasury yields of 1 percent would start to look possible.

Money markets show less than a 20 percent chance of a rate hike this year, and only coming in December if at all, according to CME’s FedWatch Tool, while there is even a very slim chance of rate cuts in coming months.

But some strategists think that markets may be taking a much too bearish view on U.S. rates and the global economy.

“Given that we think the 10-year U.S. treasury yield is factoring in a euro crisis of the magnitude of 2011-12, the Fed reversing the previous rate hike and some QE, we think only a small positive economic surprise would be required to shift sentiment bearishly for rates,” Mizuho strategist Peter Chatwell said.

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