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Bund yields rise as dovish Fed minutes push investors towards stocks

By Marius Zaharia

LONDON, Oct 9 (Reuters) - German Bund yields rose on Friday, with investors preferring stocks after minutes of the Federal Reserve meeting suggested that the U.S. central bank was not in a hurry to raise interest rates.

A bounce in commodity and energy prices -- which have depressed bond yields recently by weakening the inflation outlook -- contributed to an increase in yields across the euro zone.

The minutes showed the Fed had thought the U.S. economy was close to warranting a rate hike, but decided it was prudent to wait for evidence that a global economic slowdown was not knocking the United States off course.

Minutes from the European Central Bank's Sept. 2-3 policy meeting showed policymakers were warned of risks coming from emerging markets. Expectations for an extension of the ECB's trillion euro stimulus programme have grown in the past month.

While loose monetary policy is usually supportive for bond prices, benchmark Bund yields have broken below 0.50 percent only once since June - for a few hours last week.

Many in the bond market are wary after making losses on a rapid bounce in Bund yields from near-zero levels in May, a move that coincided with a brief uptick in inflation.

When yields are so low, an increase of just a few basis points can cause major losses for investors as they lose the protection of coupon payments, which are close to zero as well.

As a result, instead of joining the rally in shares -- as they had done in the past when reacting to signs of more central bank stimulus -- bonds have been ditched in recent weeks during periods of higher risk appetite.

"Many are reluctant to buy German 10-year bonds at levels close to 50 basis points," said Jan von Gerich, chief strategist at Nordea. "Still, as the ECB minutes yesterday reminded us, the central bank remains tilted towards further easing measures, which leaves bond yields with more downside potential."

German 10-year Bund yields were up 2 basis points at 0.61 percent, a 10 basis point rise in a week in which below-forecast economic data strengthened the case for further monetary policy measures.

Stock markets were up across Europe, reflecting the increased risk appetite.

(Reporting by Marius Zaharia; Editing by Kevin Liffey)