Euro zone bond yields edge down as German business confidence wanes

By Jaspreet Kalra

Sept 24 (Reuters) - Euro zone bond yields eased on Wednesday after data showed German business sentiment unexpectedly declined in September, while U.S. bond yields also drifted lower as investors pondered the future outlook for policy rates.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone, was down 0.5 basis points at 2.75%.

Companies in Germany were less satisfied with their current business and, reflecting increased pessimism, the Ifo institute's business climate index slipped to 87.7 in September from a revised 88.9 in August, data released on Wednesday showed.

Other regional bond yields, such as those for France and Italy, traded in line with German debt, with yields on longer-tenor debt also lower. Germany's 30-year bond yield DE30YT=RR dipped about 0.5 bps to 3.35%.

U.S. 10-year yields US10YT=RR rose 1.5 bps to 4.13% and 30-year US30YT=RR was up 0.5 bps at 4.75%, respectively.

RISE IN EUROPEAN DEFENCE STOCKS

European defence stocks rose on Wednesday after U.S. President Donald Trump, in a rhetorical shift, said he believed Ukraine could retake all its land occupied by Russia. Bond and currency markets, however, appeared to dismiss the remarks.

Markets have grown accustomed to fading risks associated with geopolitics and trade tariffs and instead are focused on the policy easing the Fed is expected to deliver, said Chris Scicluna, head of economic research at Daiwa Capital Markets.

While softness in the German business survey data contributed to a dip in yields on the day, expectations of heavy sovereign debt issuance are likely to support higher long-tenor yields, Scicluna said.

Analysts at Goldman Sachs said in a note that volatility of longer-maturity euro area government debt, especially the 30-year point, remains elevated, likely reflecting the uncertainty in global longer-dated debt, as well as the timing and impact of Dutch pension reform.

The focus is on regional debt auctions and the release of U.S. personal consumption expenditure price data on Friday.

Italy is scheduled to sell 5-year and 10-year bonds worth up to 8.75 billion euros ($10.32 billion) later this week.

Meanwhile, investors will parse the U.S. inflation data for cues on the future path of the Fed's policy rates.

In remarks on Tuesday, Fed Chair Jerome Powell said the central bank needed to continue balancing the competing risks of high inflation and a weakening job market.

Money markets are pricing in a 94% chance of a 25 basis point rate cut by the Fed next month, per CME's FedWatch tool.

($1 = 0.8482 euros)