By Stefano Rebaudo
July 17 (Reuters) -
Euro area government bond yields edged lower on Thursday,
tracking U.S. Treasuries, amid concerns over the potential
dismissal of Federal Reserve Chair Jerome Powell.
U.S. President Donald Trump said on Wednesday he was not
planning to fire Powell, but kept the door open to the
possibility and renewed his criticism of the central bank chief
for not lowering interest rates.
Analysts said that if Powell were ousted under Trump's
pressure, short-dated yields could fall on expectations of
looser monetary policy. In contrast, long-dated yields would
rise as a less independent Fed would be seen as less credible in
fighting inflation.
Powell's current term is set to end in May 2026.
Germany's 10-year government bond yield , the
euro area's benchmark, dropped 2 basis points (bps) to 2.67%.
The 2-year yield - more sensitive to expectations for policy
rates - was flat at 1.83%.
U.S. Treasury yields edged lower on Thursday, briefly
spiking after a batch of data showed the world's largest economy
remained on a stable footing.
"A deepening in interest rate cut expectations would filter
directly into the front end of the curve," said Padhraic Garvey,
regional head of research, Americas, regarding the impact of
Powell leaving before his term.
The long-end of the curve will be questioning the risks
being added to inflation, he argued.
Elevated fiscal deficits and upward pressure on consumer
prices from tariffs have already unsettled investors.
Bottom line, market participants should expect a much
steeper curve, which happens when the gap between long-dated and
short-dated yields widens.
French 10-year yield was down 1.5 bps at 3.38%.
The gap between French and German yields - a
market gauge of the risk premium investors demand to hold French
debt - was at 70.5 bps.
Investors are focusing on the French budget approval
process, after Prime Minister Francois Bayrou proposed a 43.8
billion euro squeeze on Tuesday, which left-wing and far-right
politicians immediately criticised.
Any risk of a no-confidence motion would likely intensify
once a detailed budget bill is presented to parliament in
October, potentially prompting a widening of the yield spread.
"Maintaining this deficit target could add to political risk
premium for coming months with 10-year OAT-Bund spread
potentially reaching 80-85bp," said Aman Bansal, director
European rate strategy at Citi.
"This would likely reverse only if the government succeeds
in getting the budget approved, in which case the OAT-Bund
spread could decline to 60 bps as the 5.3% consensus for the
deficit is surprised to the downside."
Italy's 10-year government bond yields fell 2
bps to 3.56%, with the spread between BTPs and Bund yields at 88
bps. It hit 84.20 bps earlier this month, its lowest level since
March 2015.
(Reporting by Stefano Rebaudo; Editing by Toby Chopra and
Richard Chang)
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