Bund yields show biggest weekly fall since July

13 Dec, 2015

German Bund yields suffered their biggest weekly fall since July, with a further fall in the oil price helping to drive borrowing costs down sharply after the European Central Bank disappointed markets last Thursday. Ten-year yields have dropped 15 basis points to 0.54 percent this week, remaining above the 0.48 percent level seen before the ECB meeting on December 3, but well below the 2-1/2-month high of 0.74 percent hit the following day on December 4.
Falls in the oil price to seven-year lows have been the main driver of the reversal, building expectations that low inflation may lead to further easing in monetary policy in the year ahead. Money markets are already pricing in around a 50 percent chance that the ECB lowers its deposit rate by another 10 basis points next year, having cut to -0.30 percent from -0.20 percent last week.
"There was a slight over-reaction in the markets after the ECB and oil certainly did not help inflation expectations," Rabobank strategist Lyn Graham-Taylor said. German yields were down 2 bps on Friday, the best period for the Bund since the week ending July 17. All other euro zone bond yields were flat to a touch lower on the day. With Greek yields hovering near post-election peaks, the cost of insuring Greek bonds against default jumped to a five-week high as concerns continued to creep up about the International Monetary Fund's involvement in its bailout programme.
Earlier this week Greek Prime Minister Alexis Tsipras accused the Washington-based global lender of making unrealistic demands on Greece in terms of reforms and on its euro zone partners for debt relief beyond what they can accept. On the ratings front strategists see an outside chance of Standard & Poor's lowering on Friday its AA rating on France, for which it has had a negative outlook for 14 months. "(There is a) small chance for it to pull the downgrade trigger not just next year but already today," Commerzbank said in a note to clients.

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