Bonds: 'Let's wait and see', Fed's Bullard says

These were the movements in some of the most widely-followed 10-year sovereign bond yields:

US: 1.59% (+2bp)

UK: 0.57% (+1bp)

Germany: -0.39% (-0bp)

France: -0.14% (+2bp)

Italy: 0.97% (+2bp)

Spain: 0.27% (+1bp)

Portugal: 0.31% (+2bp)

Greece: 1.03% (+0bp)

Longer-term government bond yields edged higher amid reports that the number of new coronavirus cases in China could be slowing, even as some central bankers cautioned that they were monitoring events.

The rise came even as the head of the US central bank, the Federal Reserve, and his lieutenant at the St.Louis Fed bank sounded a cautious note on the so-called Wuhan virus.

In remarks to the CFA Society in St.Louis, James Bullard told participants "let's wait and see", while his boss, Jerome Powell, told the House of Representative's Financial Services Committee that the current stance of monetary policy "was likely to remain appropriate" and that policymakers were monitoring the coronavirus and its impact.

However, Powell added that: "If developments emerge that cause a material reassessment of our outlook, we would respond accordingly."

Just the day before, the head of the World Health Organisation warned that virus cases outside of China might turn out to be just the tip of the iceberg.

In his remarks, Bullard argued that the chances of a 'soft landing' in the US in 2020 were "reasonable", thanks to the interest rate cuts carried out in 2019.

But the coronavirus posed a new risk and the Chinese economy was expected to "grow noticeably slower" in the first quarter.

Based on past precedent, the impact on 10-year US Treasury yields could be "tangible" until the outbreak was clearly contained, he added.

Graphs included alongside ghis presentation showed that they had falen by as much as half a percentage point in just a matter of weeks and later reverted about a month after the outbreak.

He also emphasised that policy had been eased by more than one might guess from the 2019 rate cuts, because as of late 2018 expectations had in fact been for the Fed to "raise rates further, not lower rates".

"One straightforward reading of these events is that the outlook for shorter-term interest rates influenced by the FOMC, as embodied in the two-year Treasury yield, dropped by 144 basis points from early November 2018 to early January 2020 because of FOMC actions," one of the presentation slides read.

Bullard was one of the few policymakers at the Fed arguing against moving to fast on raising rates in 2018.

Yet according to the NY Times, at the same event Bullard also said that the Fed's purchases of Treasury bills had "blurred" its message on monetary policy.

To take note of too, overnight the US President's $4.8trn budget proposal fiscal year 2021 was unveiled, which according to the Wall Street Journal called for a $4.0trn reduction in spending over the next 10 years.

Against that backdrop, speaking in Nottingham on Tuesday, Bank of England policymaker, Jonathan Haskel, reiterated his call for lower interest rates.

"Limited conventional monetary policy space means I continue to prefer to move now," Haskel said.

Meanwhile in the euro area, European Central Bank chief economist, Philip Lane, said that the interest rate at which lenders might have an incentive to pull back on lending had not been reached.

"Currently, we are in in a second stage in which the accommodative monetary stance is still required in order to support the robust convergence of inflation to our aim over the medium term," Lane added.

"Underlying our monetary policy stance is the determination to avoid the macroeconomic risks of inflation stagnating at the current level, in recognition of the associated fundamental threat to medium-term price stability."

Nonetheless, in remarks to the European Parliament, ECB chief, Christine Lagarde, called for Europe to complete its Economic and Monetary Union, arguing that "the longer our accommodative measures remain in place, the greater the risk that side effects will become more pronounced."