MILAN - German bond yields steadied on Wednesday, tracking U.S. Treasuries after Federal Reserve Chair Jerome Powell's testimony, while peripheral borrowing costs fell after comments from Italian prime minister Mario Draghi.
"We will not raise interest rates pre-emptively because we fear the possible onset of inflation. We will wait for evidence of actual inflation or other imbalances," Powell told a U.S. House of Representatives panel.
"The fixed income market is currently consolidating, with the U.S. 10-year bond yield at around 1.5% and the 10-year Bund at -0.15%-0.2% ahead of the next U.S. job data, which might trigger further direction," Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors, said.
Germany's 10-year government bond yield, the benchmark for the bloc, fell 1 basis point at -0.17%.
"With the first round of post-meeting Fed guidance out of the way, markets seem to be calming around levels from last Wednesday," Commerzbank analysts told customers, adding that they stick with their "short bias in Bunds".
Italian bond prices - which move inversely with yields - outperformed as the European Commission approved on Tuesday Italy's 191.5 billion euro plan and after Prime Minister Mario Draghi said EU fiscal stimulus was essential.
Italy needs an EU-wide expansionary fiscal policy to achieve stable growth after the COVID-19 pandemic, Draghi told parliament on Wednesday ahead of a European Union leaders meeting.
"Draghi's statements are supporting peripheral bonds, especially those statements related to the stability pact and when he hints to the fact that the EU recovery plan could become permanent," Allianz's Maxia added.
The European Union's stability and growth pact will not be enforced in the same form as before the COVID-19 pandemic, Draghi added.
Italy's 10-year government bond yield was down 2 basis points to 0.88%, after falling as much as 3 bps. Spain's and Portugal's 10-year yields were also down 2 bps.
German and euro zone June PMI data didn't trigger much price action as investors already priced in an improvement in the economy.
Analysts said euro zone government bonds would be supported by the dovish stance of the European Central Bank, which is expected to last longer than the Fed’s.
Unicredit analysts see a tightening of the yield spread between U.S. and German government bonds in the coming months to reflect the difference in central bank support, especially once the Fed starts a formal discussion on QE tapering.
They said in a research note euro zone’s supply was likely to be negative due to ECB purchases, while purchases from the Fed are expected to be lower than net issuance.
(Reporting by Stefano Rebaudo; Editing by Giles Elgood) ((firstname.lastname@example.org; +390266129431;))