September 29, 2016 / 7:41 AM / 10 months ago

Oil rally puts a dent in euro zone bond markets

LONDON, Sept 29 (Reuters) - Euro zone government bonds yields were broadly higher on Thursday, with Finland's 10-year yield moving out of negative territory, as a surprise decision by OPEC to trim crude oil output boosted both oil prices and risk appetite globally.

Oil prices soared more than 6 percent on Wednesday on news of the first agreement by the Organization of the Petroleum Exporting Countries to limit its production since 2008.

While there was some caution as markets opened on Thursday as to how OPEC would implement such a plan, oil prices held near their highs, underpinning stocks and risk appetite while refocusing bond investors' attention on inflation prospects.

The result was a sell-off in bonds, which have seen strong gains this week as concerns about the health of Germany's biggest lender -- Deutsche Bank -- boost the appeal of safe-haven debt.

Germany's benchmark 10-year bond yield rose for the first time this it week, rising 2 basis points to minus 0.13 percent . Two-year yields moved further away from a record low of minus 0.71 percent hit at the height on Germany banking fears on Tuesday.

Across the euro zone, bond yields were about 2 bps points higher, with Finland's 10-year bond yield at 0.01 percent having closed in negative territory for two straight days .

Patrick Jacques, European rates strategist at BNP Paribas, said he thought the upward pressure on bond yields would prove temporary.

"Even if there's a 5 percent rise in oil prices, this will not trigger a strong rebound in inflation and at these levels, oil output is still higher than demand so we're unlikely to see a massive rally in oil," he said. "So, I view this move in bond yields as a short-term correction."

Germany, Europe's biggest economy, is set to release preliminary inflation numbers for September later in the day. That will be followed on Friday by the flash estimate of September euro zone inflation numbers.

Elsewhere, Italy is scheduled to sell government bonds including a new 5-year BTP later in the day.

In Spain, politics moved back into the market spotlight after senior members of the Socialist party resigned en masse in a bid to unseat their leader and break a political impasse that has left the nation without a new government for nine months.

There was no immediate impact on Spanish bonds, which together with their Italian and Portuguese peers drew support from the recovery in risk appetite.

Peripheral bond markets in the euro zone often move in line with other risk assets such as stocks.

For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

Reporting by Dhara Ranasinghe; Editing by Raissa Kasolowsky

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