LONDON: The impact of tumbling oil prices on German Bunds proved to be temporary on Monday as investors were reluctant to push yields lower so close to the anniversary of one of the biggest sell-offs in the European benchmark.
Ten-year Bund yields fell as low as 0.119 percent after the market opened, but quickly bounced back above 0.14 percent even as oil prices were down 5 percent after a meeting by major exporters in Qatar that collapsed without an agreement to freeze output.
It didn't help that markets expected no new easing signals from the European Central Bank at its meeting this week, having unveiled a comprehensive package in March aimed at creating inflation.
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. Some analysts had expected Bund yields to fall even further than they did after the Doha talks.
"It is a bit surprising, but we're now at these ultra-low levels ... and people are a bit cautious to set up longs in Bunds," ING senior rate strategist Martin van Vliet said.
Bunds remained within touching distance of the 0.05 percent record low hit on April 17 last year. The trough was quickly followed by a sell-off that 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.
Analysts also said there was no incentive to buy the Bund in a week in which the ECB meeting was not expected to produce anything earth-shattering.
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 ECB meeting this week will be a low profile one," said KBC strategist Piet Lammens.
Yields on lower-rated euro zone bonds rose in line with Bunds.
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