U.S. Treasury yields and European government bond yields fell in European morning trade on Thursday as markets digested the Federal Reserve's interest-rate decision, with focus now shifting to the European Central Bank's meeting.
The Fed left interest rates unchanged, as expected, while the ECB is also set to hold rates, leaving markets focused on when borrowing costs are likely to rise again.
The two-year Treasury yield fell 6.3 basis points to 4.670%, while the 10-year yield declined 5.4 basis points to 4.990%, according to Tradeweb.
The 10-year German Bund yield fell 3.3 basis points to 3.351%, while the 10-year French OAT yield was down 3.2 basis points at 4.908%. The U.K. gilt yield was down 4.9 basis points at 5.298%, with focus shifting from Wednesday's budget to next week's Bank of England decision.
"Bonds are better supported after the Fed," said Commerzbank rates strategist Erik Liem.
The Fed kept the fed funds rate at 3.75%-4.00%, with Lisa Cook and Beth Hammack dissenting and favoring a 25-basis-point hike. However, Chairman Kevin Warsh said that financial and credit conditions had tightened since the Fed raised rates last month.
"There is no doubt the markets have done some of the work for the Fed with higher rates and tighter credit conditions, especially within some of the frothier areas of the AI capex segment," said John Luke Tyner, portfolio manager and head of fixed income at Aptus Capital Advisors.
Still, Chairman Warsh said that "while overall financial conditions are tighter, I'm unwilling and unable to call them tight." U.S. money markets priced an 80% chance of a rate hike in December, LSEG data showed.
In response to Warsh's press conference, bond yields were mixed, with the two-year yield falling and the 10-year yield rising.
"Warsh's refusal to give forward guidance risks being self-defeating: the market-driven restraint he's counting on eased as the front end rallied," said Ali Hassan, portfolio manager at Thornburg Investment Management.
Macquarie Group's baseline remains that a total of 50 basis points in rate hikes lie ahead from the Fed, with the most likely timing being 25 basis points each in December and March, said David Doyle, head of economics.
In the eurozone, the ECB is expected to hold rates, keeping the deposit rate at 2.50%, with the recent jump in French government bond yields due to budget worries likely to concern policymakers. Money markets priced a 65% probability of a hike in December, according to LSEG.
"A rate hike is virtually off the table following the latest developments in OATs," Commerzbank's Liem said, referring to the recent surge in French bond yields, leading to the widest yield spread over German Bunds since late 2011.
Investors will be on the lookout for potential comments by ECB President Christine Lagarde on the recent sharp widening of 10-year French OAT-German Bund yield spreads.
Lagarde is likely to "push back firmly" against any speculation that the ECB could intervene to stabilize bond markets using its Transmission Protection Instrument, said Martin Wolburg, senior economist at Generali Investments in a note. The ECB should also leave the door open to a hike in December, he said.
ECB policymakers will remain concerned about inflationary pressures in addition to widening intra-eurozone bond spreads.
"The ECB's problem is no longer just inflation; it is inflation plus spreads," said Kevin Thozet, member of the investment committee at Carmignac.
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