German Bund yields dip as oil prices fall again

LONDON: German Bund yields dipped on Monday as oil prices resumed their fall, keeping inflation expectations subdued and maintaining the prospect of further European Central Bank monetary policy easing.

Oil prices have been one of the main drivers in euro zone debt markets, as long-term measures of the market's inflation expectations such as the five-year, five-year breakeven forward remain well below the ECB's target of just below 2 percent.

The ECB cut its deposit rate further into negative territory this month and extended its 60-billion-euro-a-month asset purchase programme by six months until March 2017.

German 10-year Bund yields, which set the standard for euro zone borrowing costs, fell about 2 basis points to 0.61 percent. They are trading about 6 basis points up on the year, having failed to break below zero in April.

Bund futures were up 31 ticks at 158.15.

"Oil prices could be part of this but it's probably just minor trades that we're seeing here, we shouldn't read too much into it," Rabobank analyst Bas van Geffen said. "Most market participants have already closed their books and small ... (trades) can move markets quite a lot."

Oil fell close to $37 a barrel, trading within sight of an 11-year low.

By 1445 GMT, trading volumes in Bund futures were less than 100,000 lots, just about half what they were on Wednesday, the last trading day before Christmas. The daily average for the year was over 600,000 lots.

London was closed for a bank holiday.

Most euro zone bond yields were down 1-4 basis points, including Spain's.

Thanks to the ECB's backstop, Madrid's financial markets have stayed strong despite an inconclusive result in December's elections, which set the stage for weeks or perhaps months of tough negotiations to form a government.

Less than one-third of Spaniards want a re-run of last Sunday's election, with two-thirds favouring a pact between parties, a poll showed on Thursday.

Spanish 10-year yields were down 3 basis points at 1.81 percent.

Money markets were still pricing in a 40-50 percent chance of a further cut in the ECB's deposit rate in the coming year.