LONDON: German bond yields fell on Wednesday, hauled down by a drop in long-term inflation expectations and relief that a sale of 10-year debt went smoothly.
Significant market moves were capped a day before a European Central Bank meeting, even though investors do not expect any new hints of easing following last month's stimulus measures.
Germany sold about 3.2 billion euros of bonds in a top-up of its 0.50 percent 10-year Bund at an average yield of 0.15 percent, half the previous auction's yield.
A bid-to-cover ratio of 1.4 suggested solid demand for Bunds even with yields at low levels, analysts said. The ECB's asset purchases remained a key supporting factor at recent government bond sales.
The sale comes off the back of a 6.5 billion euro issue of an Italian 20-year bonds on Tuesday and auctions from Belgium and Slovakia on Monday. Analysts said the fall in yields was partly due to relief that supply was out of the way.
"Bund auctions are usually an accident-prone event, but today there are no signs of any risks whatsoever and that's certainly encouraging heading into the ECB meeting," said David Schnautz, a Commerzbank interest rate strategist.
Germany's 10-year Bund yield fell 3 basis points to 0.15 percent, within sight of the one-year low of 0.075 percent hit earlier this month. Other euro zone bond yields, with the exception of Portugal's, were 1-2 bps lower.
The ECB's favourite market measure of long-term inflation expectations -- the five-year, five-year forward rate -- fell back below 1.40 percent for the first time in six weeks . The central bank's target inflation rate is close to 2 percent.
Oil prices, which have slid more than 60 percent since mid-2014, have pushed down inflation expectations in the euro zone and in turn depressed bond yields.
Brent crude futures, the international benchmark, fell 1.5 percent in early trading after Kuwaiti workers ended a strike that had cut production from the Middle Eastern country, but closed slightly up on the day as the United States reported smaller-than-expected stockpiles.
A euro zone bank lending survey also refocused market attention on Thursday's ECB meeting.
The ECB's asset-purchase programme is hurting bank profits while its contribution to easing lending conditions is small or diminishing, according to an ECB survey of lenders released on Tuesday.
"Given the results of the bank lending survey, the ECB will stress that they think their measures are working and will stand ready to act again if needed," Lenz said.
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