LONDON: Euro zone bond yields inched down on Wednesday on signs that a deal between top oil producers to freeze oil prices looked on shaky ground and investors focused on the prospect of more monetary easing from the ECB next month.
Top oil producers Russia and Saudi Arabia on Tuesday agreed to limit oil production at January levels contingent on Iran, the Organization of Petroleum Exporting Countries' fourth-largest producer, agreeing to join the freeze.
Yet on Wednesday Iran's OPEC envoy said it will continue to increase oil output until it reached its pre-sanctions production level. Brent crude was up 28 cents at $32.46 a barrel by 0904 GMT, but the bond market focused on Tuesday's $1.21 fall.
Bond yields have closely tracked moves in crude over the last eight months because of the feed through from low prices on dimming inflation expectations which the European Central Bank is attempting to prop up.
"This is going to hit bonds because of the potential impact on inflation expectations," Rabobank strategist Matt Cairns said.
Markets are already geared for the ECB to lower interest rates deeper into negative territory at its meeting next month , while an expansion or extension of its asset purchase programme is also on the cards.
ECB President Mario Draghi has signalled he is ready to ease policy if the financial market turmoil or low energy prices reduce inflation expectations, but Governing Council Ewald Nowotny does not want a repeat of December where investors' expectations became unrealistically high.
German 10-year yields - the bloc's benchmark - fell 1 basis point to 0.25 percent, retreating from Tuesday's high of 0.28 percent hit after the news broke that Russia and Saudi Arabia had agreed, in principle, to limit oil production.
Yields remain well above a nine-month low of 0.133 percent hit last week so Germany attracted more bids than in January at a 10-year bond auction, although the total amount was still slightly lower than what was on offer.
Most other euro zone bond yields fell between 1-3 basis points.
One-year euro zone inflation swap rates fell back to minus 0.11 percent having hit zero on Tuesday.
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