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Euro zone bond markets spooked by oil price surge

Written by Business World, on 12th Dec 2016. Posted in EU

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Euro zone government bond yields shot higher on Monday after a historic deal between OPEC and other oil producers to cut output caused a 5% surge in crude prices and put reflation trades back on the table.

Portugal, perceived as the weakest link in the bloc, bore some of the heaviest selling, with 10-year yields soaring to 3.91% -- their highest level since a February selloff triggered by worries about the health of European banks.

And with short-dated bond yields anchored by the European Central Bank's decision last week to buy more short-dated government debt, longer-dated bonds also suffered from growing inflation expectations.

Germany's benchmark 10-year bond yields jumped 7 basis points to 0.42%. The yield on 30-year German bonds was 11 bps higher at 1.25%, pushing the gap over two-year bond yields to 199 bps as the yield curve steepened.

Oil prices shot to their highest levels since mid-2015 , climbing above $57 a barrel on Monday, after the Organization of the Petroleum Exporting Countries and other producers agreed to jointly reduce output in order to rein in oversupply and prop up markets.

"If even non-Opec countries are joining the oil output cuts, there is a pretty good chance we get a deficit in oil supply," said Rene Arecht, a rates strategist at DZ Bank. "This is why bond markets are now pricing in a higher inflation risk."

Most euro zone government bond yields were 5 to 10 bps higher on the day, while U.S. 10-year Treasury yields rose above 2.5% for the first time since October 2014.

A market gauge of euro zone inflation expectations, the five-year, five-year breakeven forward, extended its rally to a one-year high above 1.73%.

In another sign of the reflation trade, breakeven rates - the gap between yields on five-year U.S. debt and a matching tenor in inflation-protected securities - was at two-month highs, indicating markets are expecting inflation to accelerate. (Reuters)

Source: www.businessworld.ie

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