LONDON: Yields on safe-haven euro zone bonds rose on Thursday, giving up earlier falls, as news that China would suspend its stock market circuit breaker mechanism boosted risk appetite.
Investors have piled into low-risk bonds this week amid turmoil in Chinese markets and rising geopolitical tensions in North Korea and the Middle East.
And with oil prices sliding to near 12-year lows, expectations of further monetary stimulus from the European Central Bank to meet an inflation target of around 2 percent should continue to underpin euro zone debt, analysts said.
But focus remained on China and a suspension of the country's stock market circuit breaker as of Friday after the mechanism sparked sharp falls in already volatile markets.
"The scrapping of the circuit breaker has given a little bump to risk appetite," said Owen Callan, senior analyst at Cantor Fitzgerald.
"It had become a bit of a self-fulfilling prophecy and people had started to worry it was exacerbating the falls in Chinese stocks."
Yields were higher across the region and analysts said investors were taking some profits after three days of price gains.
Germany's 10-year Bund yield rose 3.7 basis points to 0.54 percent, having fallen earlier in the day to a one-month low of 0.48 percent.
ECB WATCH
Two-year bond yields in Germany dipped below -0.40 percent for the first time since the ECB's last meeting on Dec. 3 and remained below those levels even as long-dated yields headed higher in late trade.
Debt investors moved to price in a 50 percent chance of a further rate cut from the European Central Bank at its March meeting as Thursday's Chinese market rout and sliding oil prices dimmed the outlook for inflation.
"The ongoing uncertainties surrounding China, driving energy prices lower, has certainly boosted hopes that the ECB might extend or intensify its asset purchase programme," said DZ Bank strategist Christian Lenk.
Crude prices, already depressed by global oversupply, slumped to their lowest since April 2004 as sharp falls in China's currency and stock markets raised fears about demand in the world's second largest economy.
This, in turn, hauled down market gauges for future consumer price growth in the euro zone -- worsening the headache for the ECB, which launched a new round of monetary stimulus last month.
Forward euro zone overnight interbank lending rates (EONIA) dated for the ECB meeting on March 10 traded at -0.30 percent on Thursday, around 5 basis points below the spot overnight rate of -0.25 percent. Analysts said this indicated a 50 percent probability of a further 10 basis point cut.
No rate cuts are expected at the ECB's next meeting on Jan. 21, according to these prices.
One-year inflation swaps hit a 3-1/2-month low of 0.08 percent, having fallen more than 55 basis points since early December.
Long-term inflation expectations also hit their lowest level in three months. The euro five-year, five-year breakeven forward , which shows where markets expect 2026 inflation forecasts to be in 2021, fell to 1.6140 percent.
The latest readings for euro zone inflation released this week showed prices rising at 0.2 percent, missing expectations for a rise of 0.3 percent and far short of the bank's target of close to 2 percent.
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