LONDON: German bond yields are set to record their biggest weekly fall in four weeks, with an oil price slump helping to drive borrowing costs sharply down again after the European Central Bank disappointed markets last Thursday.
Ten-year yields have dropped 12 basis points to 0.56 percent this week, remaining above the 0.48 percent level seen before the ECB meeting on Dec. 3 but well below the 2-1/2-month high of 0.74 percent hit the following day on Dec. 4. Falls in the oil price to near seven-year lows have been the main driver of the reversal, building expectations that low inflation may lead to more easing in the year ahead.
Money markets are already pricing in around a 50 percent chance that the ECB lowers its deposit rate by another 10 basis points next year, having cut to -0.30 percent from -0.20 percent last week. "There was a slight over-reaction in the markets after the ECB and oil certainly did not help inflation expectations," Rabobank strategist Lyn Graham-Taylor said.
German yields were down 1 bps on Friday, on course for the best period for the Bund since the week of Nov. 9, when Reuters reported a consensus for a rate cut was forming at the ECB and it was considering including municipal bonds in its bond-buying programme. Both measures were announced after the December meeting. All other euro zone bond yields were flat to a touch lower on the day.
With Greek yields hovering near post-election peaks, the cost of insuring Greek bonds against default jumped to a 5-week high as concerns continued to creep up about the International Monetary Fund's involvement in its bailout programme.
Earlier this week, Greek Prime Minister Alexis Tsipras accused the Washington-based global lender of making unrealistic demands both on Greece for tough reforms and on its euro zone partners for debt relief beyond what they can accept.
Investors were also waiting for US data due later on Friday which could cement already firm expectations that the Federal Reserve is gearing up to hike rates for the first time in a decade next week.
US retail sales, inflation and consumer sentiment data is due between 1330GMT and 1500GMT.
On the ratings front, strategists see an outside chance that Standard & Poor's could lower on Friday its AA rating on France, for which it has had a negative outlook for 14 months.
"(There is a) small chance for it (S&P) to pull the downgrade trigger not just next year but already today," Commerzbank said in a note to clients.
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