Euro zone bond yields balance risk sentiment, Fed

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Euro zone bond yields sought direction on Monday at the start of a busy week, as risk sentiment weakened and investors prepared for the U.S. Federal Reserve meeting’s outcome on Wednesday.

The Fed is still expected to lay the groundwork for a slowdown of its bond purchases at its policy meeting on Tuesday and Wednesday, though the consensus is for an announcement on that to come later in the year.

Risk sentiment weakened across global markets as a slide in commodities prices hit European stocks and fears grew around indebted Chinese property developer Evergrande rippling through China’s property sector before the company’s bond payment due on Thursday.

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Germany’s 10-year yield, the benchmark for the euro zone, was down over a basis point to -0.295% by 0716 GMT.

It held below the 10-week high touched on Friday after a report suggested the European Central Bank expects to hit its inflation target by 2025.

Other 10-year euro area bond yields were between two basis points higher to two basis points lower.

“Bunds remain vulnerable ahead of the crucial Fed meeting with likely clear signals that tapering is imminent and the risk of shifting dots while fragile risk sentiment provides support,” said Rainer Guntermann, rates strategist at Commerzbank in Frankfurt.

“ECB inflation views are another factor and could continue to weigh on Bunds given persistent upward pressure on break-evens and real yields no longer falling.”

After Friday’s sell-off, focus on Monday will be on the European Central Bank again, with board member Isabel Schnabel due to give a speech at 1135 GMT.

There was little reaction in Portuguese and Greek bonds to rating upgrades from Moody’s and DBRS respectively.

Uncertainty before an election in Germany, where the Social Democrats lead opinion polls that point to a highly fragmented outcome, is also keeping the bloc’s debt investors on their toes.

(Editing by Timothy Heritage)