Investors snapped up eurozone bonds Friday, anticipating the European Central Bank may step more heavily into the market after the US decision to keep interest rates on hold.
Around 0930 GMT the rate of return to investors in secondary trading of benchmark 10-year German government bonds fell to 0.686 percent from 0.781 on Thursday evening before the US Federal Reserve held its key interest rate locked at zero citing worries about how the slowdown in China will hit the US economy.
The yield on similar French bonds fell to 1.058 percent from 1.164 percent, while Spanish bonds slid to 2.017 percent from 2.092 percent and Italian debt dropped to 1.1810 percent from 1.904 percent.
The fall in German bond yields was the biggest since early July, while Italian and Spanish bond yields sank to their lowest since late August, Bloomberg News reported.
The US rate decision followed a pledge earlier this month by the European Central Bank to scale up its contentious QE stimulus programme of bond purchases if the eurozone recovery stalls.
"If the developments over summer held the Fed back from moving when they’re at the beginning of a tightening cycle, what does that mean for the ECB, who are still in the midst of easing?" Laurence Mutkin, global head of Group-of-10 rates strategy at BNP Paribas SA in London, said in an interview on Bloomberg Television’s "Countdown" programme with Guy Johnson.
"It implies that there ought to be more easing to come. We think during the fourth quarter they’re going to announce an extension of QE,” Mutkin was quoted as saying by Bloomberg News.
Increased ECB purchases of government bonds would push down yields, thus investors looking to lock in future interest returns have an incentive to buy now.
Short-term investors could also gain if the ECB steps up purchases, as that would raise the prices for bonds, which move inversely with the yield.
Outside the eurozone, the yield on British 10-year bonds also fell, to 1.858 percent from 1.955 percent.