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German business mood darkens

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Bond and currency markets unmoved by Trump's rhetoric

shift on

Ukraine

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Focused on prospect of further Fed easing

By Jaspreet Kalra

Sept 24 (Reuters) - Euro zone bond yields eased on

Wednesday after data showed German business sentiment

unexpectedly declined in September, while U.S. bond yields also

drifted lower as investors pondered the future outlook for

policy rates.

Germany's 10-year bond yield, the benchmark for

the euro zone, was down 0.5 basis points at 2.75%.

Companies in Germany were less satisfied with their current

business and, reflecting increased pessimism, the Ifo

institute's business climate index slipped to 87.7 in September

from a revised 88.9 in August, data released on Wednesday

showed.

Other regional bond yields, such as those for France and

Italy, traded in line with German debt, with yields on

longer-tenor debt also lower. Germany's 30-year bond yield

dipped about 0.5 bps to 3.35%.

U.S. 10-year yields rose 1.5 bps to 4.13% and

30-year was up 0.5 bps at 4.75%, respectively.

RISE IN EUROPEAN DEFENCE STOCKS

European defence stocks rose on Wednesday after U.S. President

Donald Trump, in a rhetorical shift, said he believed Ukraine

could retake all its land occupied by Russia. Bond and currency

markets, however, appeared to dismiss the remarks.

Markets have grown accustomed to fading risks associated

with geopolitics and trade tariffs and instead are focused on

the policy easing the Fed is expected to deliver, said Chris

Scicluna, head of economic research at Daiwa Capital Markets.

While softness in the German business survey data

contributed to a dip in yields on the day, expectations of heavy

sovereign debt issuance are likely to support higher long-tenor

yields, Scicluna said.

Analysts at Goldman Sachs said in a note that volatility of

longer-maturity euro area government debt, especially the

30-year point, remains elevated, likely reflecting the

uncertainty in global longer-dated debt, as well as the timing

and impact of Dutch pension reform.

The focus is on regional debt auctions and the release of

U.S. personal consumption expenditure price data on Friday.

Italy is scheduled to sell 5-year and 10-year bonds worth up to

8.75 billion euros ($10.32 billion) later this week.

Meanwhile, investors will parse the U.S. inflation data for

cues on the future path of the Fed's policy rates.

In remarks on Tuesday, Fed Chair Jerome Powell said the

central bank needed to continue balancing the competing risks of

high inflation and a weakening job market.

Money markets are pricing in a 94% chance of a 25 basis

point rate cut by the Fed next month, per CME's FedWatch tool.

($1 = 0.8482 euros)