LONDON: German 10-year Bund yields fell on Wednesday to their lowest levels since last May's dramatic bond sell off, as sliding oil prices rattled global markets and fuelled talk that the ECB may need to take further steps soon to lift inflation.
Bund yields tumbled almost 8 basis points to 0.406 percent , suffering their biggest daily sell off since the first trading day of the year. They have not ventured far from the 0.50 percent mark since last year's jump from zero percent to 1 percent caused double-digit losses for many investors.
The European Central Bank meets on Thursday and is not expected to take any action after cutting its deposit rate and extending the life of its quantitative easing last month.
But a more than 30 percent decline in oil prices since the ECB last met on Dec. 3 has stoked talk that further stimulus will be needed to boost inflation, which is at just 0.2 percent in the euro zone compared with the ECB's 2 percent target.
In addition, the rout in oil markets and concerns about China have stoked concerns about the global growth outlook, driving investors into safe-haven bond markets.
"Lower yields are being driven by expectations that the world economy is in serious trouble," said Societe Generale strategist Ciaran O'Hagan. "The ECB will be on hold tomorrow but there will be a recognition that if inflation prospects remain poor it will have to ease further in March."
Two- and five-year German bond yields hit their lowest since the ECB's December meeting at -0.417 percent and -0.208 percent, respectively. French 10-year yields fell to 0.79 percent , also their lowest level since Dec. 3.
CAUTION
Even with Bund yields down more than 20 basis points since the start of the year, some analysts said they were surprised they had not fallen further given the global backdrop.
They attributed this to caution after bond markets experienced one of their sharpest ever sell offs in April and May last year, showing that even safe-haven assets can turn high risk overnight when yields are close to zero and any rise is not compensated by coupon payments.
"There is still some reservation for investors to increase exposure to Bunds at these levels because everyone has memories of last year when we had these aggressive sell offs," said Michael Leister, head of rate strategy at Commerzbank in London.
Yields in peripheral government bond markets, which often come under pressure at times of general risk aversion, rose.
The yield on 10-year Portuguese bonds rose to a two-month high of 2.88 percent, pushing the gap over German Bund yields to its widest in six months.
European stock markets tumbled more than 3 percent and Asian shares slid to four-year lows on Wednesday amid a relentless sell off in oil prices.
After ECB easing measures failed to meet the market's high expectations in December, money markets price in a roughly 10 percent chance that rates will be cut by a further 10 basis points at Thursday's meeting.
The probability increases to about 50 percent in March, when the ECB staff forecasts are updated, and 100 percent by mid-year.
"There is speculation that the ECB, while not announcing new measures tomorrow, will at least hint at new measures in case inflation expectations continue to drop, as well as refer to the even lower oil price," said DZ Bank strategist Daniel Lenz.
The ECB's stimulus programme is working but there are limits to what monetary policy can do to lift growth in the euro zone, Governing Council member Ewald Nowotny said on Wednesday.
Comments
Comments are closed for this article.