Eurozone periphery bonds strengthen as Fed cuts rate outlook

The Eurozone periphery bonds strengthened Thursday as the Federal Reserve officials lowered their outlook for long-term interest rates. Also, investors preferred safe-haven assets after the central bank lowered its economic growth forecast.

The French 10-year bond yields, which moves inversely to its price, fell 5-1/2 basis points to 0.178 percent, Irish 10-year bonds yield fell 6 basis points to 0.424 percent, Italian equivalent also dipped 7-1/2 basis points to 1.212 percent, Netherlands 10-year bonds yield inched 6 basis points lower to 0.057 percent, Portuguese equivalents tumbled 3 basis points to 3.372 percent and the Spanish 10-year bonds yield slid 6-1/2 basis points to 0.940 percent by 10:30 GMT.

The Federal Open Market Committee left fed funds rate unchanged in a 0.25-0.50 percent range, in line with market expectations. One key highlight of the statement was the note that near-term risks to the economic outlook appear roughly balanced. However, the Committee continues to closely monitor inflation indicators and global economic and financial developments.

Additionally, the statement noted that information received since the July meeting indicates that the labour market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. This is shows renewed support for the outlook, advancing from the improvement noted in the July statement.

After the Fed policy decision, the United States benchmark 10-year Treasury yield fell below 1.65 percent mark, now trading 2-1/2 basis points lower at 1.634 percent by 10:30 GMT.

Moreover, the updated individual Fed forecasts for 2016 revealed GDP lower at 1.7 percent to 1.9 percent, from previous forecast of 1.9 percent to 2.0 percent, unemployment rate at 4.7 percent to 4.9 percent, from 4.6 percent to 4.8 percent and PCE inflation at 1.2 percent to 1.4 percent, from previous estimates of 1.3 percent to 1.7 percent.

Longer-term inflation expectations kept unchanged at 2.0 percent, alongside longer-run unemployment at 4.7 percent to 5.0 percent. Overall, the median forecast for the midpoint of the target rate/range is around 0.625 percent by the end of 2016, down from 0.875 percent and 1.125 percent by the end of 2017, down from 1.625 percent.

According to Bloomberg, the European Central Bank will probably stay on hold until the end of the year as it waits for previous policy measures to take their full effect, according to unidentified. The report also says that the ECB has little interest in lowering its deposit rate further, but is unlikely to abruptly halt quantitative easing in March.

We continue to expect just an extension of QE to be announced in December and still would not rule out a final 10 basis points deposit rate cut if conditions worsen.

Lastly, investors will also remain keen to focus on the upcoming ECB President Draghi speech and PMI data.

Meanwhile, the pan-European STOXX 600 index was up 1.13 percent and the euro-area blue-chip gauge the STOXX 50 climbed 1.95 percent, the PSI20 Index jumped 1.18 percent, the DAX traded 1.90 percent higher and the CAC-40 rose 1.97 percent by 10:30 GMT.