European Bonds Rise Modestly on Weak Crude Prices

European Bonds Rise Modestly on Weak Crude Prices

24 May 2016, 11:48
Roberto Jacobs
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European Bonds Rise Modestly on Weak Crude Prices

The European bonds traded modestly firmer on Tuesday as decline in oil price pushed investors’ inflation expectations lower and supported demand for safe-haven assets. The benchmark German 10-year bonds yield, which moves inversely to its price fell 2bps to 0.169 pct, French 10-year bunds yield dipped 2bps to 0.506 pct, Italian equivalents tumbled 1bp to 1.483 pct, Netherlands 10-year bonds yield down 1bp at 0.384 pct, Portuguese 10-year bonds yield slumped 1bp to 3.082 pct, Spanish 10-year bonds yield hovered at 1.580 pct and British 10-year bonds yield remained steady at 1.457 pct by 0830 GMT.

The European bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the European Central Bank's target. Crude oil prices fell on firm global supply, a stronger dollar and surging output from Iran to Europe and Asia. Yesterday, Iranian deputy oil minister quoted that Iran plans to increase oil export capacity to 2.2 million barrels by the summer and has no plans to freeze its level of oil production and export. The International benchmark Brent futures fell 0.85 percent to $47.94 and West Texas Intermediate (WTI) dipped 0.62 percent to $47.78 by 0830 GMT.

Today, the Germany first quarter Gross Domestic Product (GDP) growth remained steady at 0.7 percent, trending in the line of market consensus of 0.7 percent. On annual basis, it rose 1.3 percent; lower than the market expectations of 1.6 percent, unchanged from previous 1.3 percent in the last quarter of 2015.

Yesterday, the ECB executive board member and chief economist Praet in an interview said that very low inflation in the presence of economic slack is a 'dangerous cocktail' and the risks of de-anchoring inflation expectations have increased but this hasn't happened yet. He further added that interest rates are still in the toolbox, though at some point negative rates have important side effects, namely on bank profitability. We foresee that the ECB may trim the deposit rate by 10bps in September meeting due to too-low inflation.

Meanwhile, the pan-European STOXX 600 index was up 0.83 pct and the euro-area blue-chip gauge, the STOXX 50 climbed 0.84 pct. The FTSE 100 Index rose 0.55 pct, the DAX trading 0.80 pct higher and the CAC-40 ticked up 1.15 pct by 0830 GMT.

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