LONDON: German Bund yields dipped on Monday as oil prices plunged following a meeting by major exporters in Qatar that collapsed without an agreement to freeze output.
But the drop in yields was limited by the fact that markets do not expect any new easing signals from the European Central Bank at its meeting this week, having unveiled a comprehensive package in March aimed at creating inflation.
Brent crude futures were 5 percent lower at $40.9 per barrel. Oil prices, which have fallen by as much as 70 percent since mid-2014, have played a major role in depressing bond yields due to their impact on inflation expectations.
Ten-year Bund yields, the benchmark for euro zone borrowing costs, were down 1 basis point at 0.12 percent "The absence of an oil agreement is having some impact and it is a bit of a risk-off environment but we doubt it will go very far," said KBC strategist Piet Lammens.
"The ECB meeting this week will be a low profile one." Money market rates suggest expectations for no change in ECB interest rates until at least the last quarter of the year and an 80 percent chance of another 10 basis point cut in December.
The market's long-term inflation expectations as indicated by the widely-watched five-year, five-year breakeven forwards lingered near record lows at about 1.40 percent.
Despite the low inflation expectations and the weak oil prices, many investors remain reluctant to push Bund yields towards the record lows of 0.05 percent hit last year just before one of the biggest Bund sell-offs in recent history took yields above 1 percent in a matter of weeks.
When yields are close to zero, the absence of any protection from coupon payments means price swings are higher in a sell-off and investor losses are deeper. Commerzbank strategists recommended investors use the stronger opening in Bunds as an opportunity to sell, citing the skewed risk-reward.
Yields on lower-rated euro zone bonds rose as tumbling oil prices made investors more risk averse.
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