Euro zone bond yields rise to two-week high after Fed meeting

Euro zone bond yields rose on Thursday after Federal Reserve Chair Jerome Powell tempered expectations for a December rate cut, while traders waited for a European Central Bank meeting.

Investors were also digesting economic growth data showing Germany's gross domestic product stagnated in the third quarter compared with the previous three-month period, highlighting the struggle facing Europe's biggest economy to regain momentum amid declining exports. They were also weighing an agreement after talks on trade between U.S. President Donald Trump and Chinese President Xi Jinping.

The U.S. central bank cut interest rates by a quarter of a percentage point for the second time this year on Wednesday, as was widely expected, with the benchmark overnight rate down to a target range of 3.75%–4.00%. But what caught markets off guard was Powell saying Fed officials had struggled to reach a consensus on the future trajectory of monetary policy, and that further easing in December was "not a foregone conclusion."

Kansas City Fed President Jeffrey Schmid favoured no cut at all given ongoing inflation, and Fed Governor Stephen Miran called for a 50-basis-points (bps) rate reduction. By contrast, the European Central Bank is expected to leave interest rates unchanged for a third meeting in a row later in the day.

In the meantime, Trump said on Thursday he had agreed with Xi to trim tariffs on China in exchange for Beijing cracking down on the illicit fentanyl trade, resuming U.S. soybean purchases and keeping rare earths exports flowing. German 10-year bond yield, the benchmark for the euro zone bloc, rose to its highest since October 13, last up 2.7 basis points to 2.64%.

Italy's 10-year yield was higher by 3.6 bps at 3.42%. Germany's two-year bond yield, which is more sensitive to European Central Bank rate expectations, rose to a three week high, last up 2.1 bps at 2%.