Bunds edge up as Iran deal adds to worries about low euro zone inflation

LONDON: German Bunds inched higher on Monday as the prospect of lower oil prices following a deal to curb the Iranian nuclear programme highlighted the subdued inflationary pressures in the euro zone.

The deal with six world powers gives Iran some relief from crippling sanctions and is considered a big step towards a more lasting treaty. While Iran will not be allowed to increase oil sales for six months, the easing Middle East tensions led to lower crude prices, which - if sustained - could increase spending power globally and boost economic growth.

But Bund futures, which usually fall on prospects for better economic growth as investors switch into riskier, higher-yielding assets, rose 5 ticks to 141.00 on Monday, even as European shares rose.

This could be a sign that investors in the euro zone focused more on the disinflationary pressures the Iran deal has caused, rather than on the growth outlook, analysts said.

A surprise fall in the annual inflation for October to 0.7 percent, well below a target of just below 2 percent, prompted the European Central Bank to cut rates this month and increased speculation of further monetary policy easing.

"This is another disinflationary influence," one trader said. "Is it a boost for growth? Maybe. But my first reaction is on the inflation side."

ECB Governing Council member Christian Noyer said on Monday that interest rates have to remain low for an extended period and might go even lower if needed as officials try to ensure the euro zone does not fall into deflation.

Inflation data for November is due on Friday. German 10-year yields fell 0.6 basis points to 1.747 percent. The fall in yields came against upward pressure ahead of a sale of up to 4 billion euros of 10-year German debt on Wednesday.

"Having lower oil prices should be a boost for growth," ING rate strategist Alessandro Giansanti said. "But on Bunds the impact should be very limited as they are very sensitive to action from central banks."

"The current trend is for a decline in inflation so the focus will be on what will happen in terms of intervention from the ECB," he said. Uncertainty about the ECB outlook and about timing of any move by the Federal Reserve to reduce bond-buying stimulus was likely to keep Bunds in tight ranges in coming days.