LONDON: Bond yields of several euro zone countries touched new record lows on Tuesday after weak private sector growth data indicated a slump in oil prices offered little support to the region's sluggish economy.
Markit's flash composite Purchasing Managers' Index (PMI) for Germany fell to 51.4 in December after a final reading of 51.7 in November. That was above the 50 line denoting growth, but it was the lowest reading in 18 months and far below levels seen earlier this year.
The data reinforced bets that the European Central Bank could soon start buying sovereign bonds to pump money into the euro zone economy, cooling any expectations that the potential positive growth effect of cheaper oil could prevent such a move.
The fall in oil prices to the lowest levels in over five years was having a more significant impact in dampening inflation expectations.
The most closely watched measure of where the market sees the medium-to-long-term inflation outlook, the euro five-year, five-year breakeven forward, which shows where the market expects late 2024 inflation forecasts to be in late 2019, dropped to a new record low around 1.65 percent on Tuesday.
One- and two-year inflation swaps traded near zero, well below the ECB's target of just below 2 percent.
"The PMI data confirmed the fundamentally strongest economy in Europe is barely growing and that the sharp fall in oil prices is not feeding through in a positive way at this point," said Elwin de Groot, senior market economist at Rabobank.
"It will not derail any plans for the ECB to do QE next year," he said, using the acronym for quantitative easing, the term economists use for central bank asset purchases.
German, Irish, Belgian and Austrian 10-year bond yields fell to new record lows after the PMI data, while most other yields were within touching distance of their troughs. The German Bund yield, which sets the standard for euro zone borrowing costs, fell to as low as 0.601 percent.
Top-rated Bunds also benefited from a broader move by investors towards safer assets as they seek to shield themselves from increased oil-driven volatility in markets such as Russia, where a hefty interest rate hike on Tuesday failed to halt the rouble's selloff, or Indonesia.
Adding to the anxiety, the U.S. Federal Reserve's two-day policy meeting starts later in the day, potentially opening the door to 2015 rate hikes unless oil prices deter such plans.
In the euro zone, investors are wary of political risks with the Greek parliament holding the first round of a presidential vote on Wednesday. If Prime Minister Antonis Samaras fails to push through his candidate for the presidency, early elections will be triggered, potentially paving the way for the anti-bailout Syriza party to take over power.
"A day before the first round of the Greek presidential elections and a possible change of the Fed's wording (on the interest rate outlook) the markets are more likely to stick to their conservative positioning," said Norbert Wuthe, senior analyst at Bayerische Landesbank.
Greek 10-year yields rose 21 bps to 9.07 percent.
The euro zone PMI data was slightly better than expected but not enough to have a significant market impact. The German ZEW analyst and investor sentiment index was much higher than forecast, but markets look at the PMI index as a more accurate predictor of future economic performance.
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