Bund yields rise above 0.20 percent as oil price hits five-month high

LONDON: German 10-year Bund yields rose above 0.20 percent for the first time in a month on Thursday as oil prices jumped to a five-month high, supporting the outlook for inflation and investor appetite for riskier assets.

The European Central Bank is widely expected to refrain from further economic stimulus at its policy meeting on Thursday, providing little additional support for bonds.

German yields - the bloc's benchmark - rose 6 basis points to 0.21 percent, pulling away from last April's 0.05 percent record lows, before one of the biggest-ever Bund sell-offs took yields above 1 percent in a matter of weeks.

The approaching anniversary of that sell-off, which started at the end of April 2015 and quickly snowballed in May, is keeping investors wary of making firm bets on Bunds.

Crude oil prices rose to a five-month high on Thursday after the International Energy Agency said that 2016 would see the biggest decline in non-OPEC production in a generation, helping rebalance a market dogged by oversupply.

The bond market is tracking developments in oil prices because of their impact on inflation and worries that cheap crude can hurt the energy sector and its lenders, taking a toll on the global economy.

"The oil price has been adopted as a gauge of global growth," Intesa SanPaolo fixed income strategist Sergio Capaldi said.

Although higher oil prices support inflation expectations, the widely watched five-year, five-year breakeven forwards - which show where markets expect 2026 inflation forecasts to be in 2021 - have hugged 1.4 percent in recent weeks, far below the ECB's target of near 2 percent.

The main reason is the strength of the euro, which is firmer than it was before last month's ECB meeting, when it cut interest rates and increased its asset purchases by a third.

Thursday's meeting is expected to be more talk than action, but the German newspaper Die Zeit, citing anonymous euro zone central bank sources, reported that some ECB members were in favour of extending quantitative easing to equities.