Bonds: Gilts steady as Yellen strikes confident tone, but flags risks

These were the movements in the most widely-followed longer-term sovereign bond yields:

US: 1.72% (-1bp)

UK: 1.41% (+0bp)

Germany: 0.24% (+1bp)

France: 0.62% (+1bp)

Italy: 1.64% (-5bp)

Spain: 1.72% (-3bp)

Portugal: 3.71% (+4bp)

Japan: 0.02% (+5bp)

Sovereign bond markets in the developed world recovered a little bit of their poise on Wednesday, after the head of the US central bank struck somewhat of a middle-path, between highlighting the US economy's strengths while at the same time acknowledging potential risks to the economic outlook.

In particular, Yellen highlighted the risks to the economic outlook should the tightening in financial conditions Stateside persist and those arising from weakness in economies overseas.

The Fed's boss highlighted the uncertainty around the Chinese exchange rate, but did not sound overly downbeat on the prospects for Asia's largest economy.

"Yes, there are risks out there – and the longer the financial market rout lasts, the bigger the risk that it will become self-fulfilling –, but we believe that fundamentals are solid enough to carry the economy through this period. And this also seems to be the Fed’s view. Accordingly, the fact that financial markets do not expect the next rate hike before 2Q17 sees well overdone," said Dr. Harm Bandholz, the chief US economist at UniCredit Research.

His opposite number at Pantheon Macroeconomics, Ian Sheperdson, was somewhat more cautious, telling clients that: "the March decision will depend on the labor market data, which in all likelihood will signal the need for higher rates, and a host of market developments and non-labor data, which likely will not. We're sticking to our 55/45 call in favor of a March hike, but it will be close either way."

Yellen's speech came against the backdrop of a spate of weaker than expected industrial production figures out of the UK, France, and Italy earlier in the session.

British industrial output shrank by 1.1% month-on-month in December (consensus: -0.10%), according to ONS, with weakness visible across all sectors.

That prompted economists at Barclays to tell clients that: "we continue to believe the UK industrial production remains a cause for concern as a structural lack of competitiveness remains, itself magnified by a strong currency, which although has depreciated since mid-November is still historically strong, and government policies (fiscal consolidation and the EU referendum)."

To take note of as well, a new ICM Brexit poll revealed 42% of those canvassed would vote to leave the European Union, versus the 41% who said they would choose to stay inside.

In the emerging market space (and amongst energy producers), the yield on the 2024 local-currency Colombian government bonds rose to 8.78%, their highest since 2011, after Morgan Stanley downgraded its view on the same from 'overweight' to 'market weight'.

Next door, in Venezuela, Bloomberg picked up on local press reports according to which the country's economic vice-president, Luis Salas, recommended several days ago that Caracas should default on its external debt so as to uphold 'social justice' in the Andean country.