Oil price drop sends euro zone bond yields lower

Euro zone government bond yields fell on Thursday following a drop in oil prices that pinned long-term inflation expectations near three-week lows.

A merger between Banco Popolare and Banca Popolare di Milano did not have an immediate impact on Italian government bonds, which had been under pressure earlier this year due to concerns about the health of the country’s banking sector. Italy was due to sell zero-coupon and inflation-linked bonds later in the day.

The five-year, five-year breakeven forward traded around 1.44 per cent, well below the European Central Bank’s target of just below 2 per cent. It was even lower than before this month’s ECB meeting, when the bank cut rates, boosted the bond-buying programme, and introduced a new scheme of free long-term loans to banks.

German 10-year Bund yields fell 2 basis points to 0.178 per cent, the lowest in two weeks.

“The market is trying to digest the drop in oil prices,” DZ Bank rate strategistChristian Lenk said.

Brent crude, the global benchmark, was 23 cents down at $40.24, extending a drop of more than $1 on Wednesday. Oil prices have been an important driver of bond yields this year because of their impact on inflation and central bank moves.

Judging from the difference between December and April-dated Eonia overnight rates, money markets are pricing in a 70 per cent chance of a further 10 basis point cut in the ECB’s deposit rate to minus 0.50 per cent this year.

Most other euro zone bond yields were down about 2 basis points, with Italian 10-year yields trading at 1.27 per cent, Spanish yields at 1.44 percent and Portuguese yields at 2.77 per cent.

Trading activity was thin ahead of the Easter break. Daily trading volumes in Bund futures have averaged 500,000 this week against 600,000 last week.

Posted in Energy, News