September 29, 2016 / 10:37 AM / a year ago

UPDATE 2-Oil rally puts a dent in euro zone bond markets

(Updates prices)

By Dhara Ranasinghe

LONDON, Sept 29 (Reuters) - Euro zone government bond 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 5 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, pushing oil prices down slightly, the surprise deal boosted appetite for riskier assets and refocused 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 -- boosted the appeal of safe-haven debt.

Germany’s benchmark 10-year bond yield at one stage was on track for its biggest one-day rise in three weeks, rising 4 basis points to minus 0.11 percent, before retreating marginally.

Two-year yields moved further away from a record low of minus 0.71 percent hit at the height of Germany banking fears on Tuesday.

Across the euro zone, bond yields were 3-4 bps higher, with Finland’s 10-year bond yield at 0.02 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.

For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=


Elsewhere, Italy paid slightly more to sell 8.5 billion euros ($9.5 billion) in bonds at an auction than it did last month as investors fretted about political instability ahead of a high-stakes referendum in December on constitutional reform.

In Spain, politics also 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.

Spain’s 10-year bond yield rose 3 basis points (bps) to about 0.93 percent and was about 5 bps above Wednesday’s all-time low at about 0.88 percent.

“With Spain being the laggard among the peripherals, it appears that some increased political uncertainty is weighing on the market,” DZ Bank strategist Christian Lenk said.

“The removal of support for Socialist leader (Pedro) Sanchez could pave the way for a new leader but it’s far from certain. On the other hand, if he steps down that could increase the possibility of the Socialists supporting a government led by Rajoy,” he said, referring to acting Prime Minister Mariano Rajoy. (Reporting by Dhara Ranasinghe; Editing by Mark Trevelyan)

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