September 16, 2019 / 11:03 AM / a month ago

UPDATE 2-Euro zone bond yields tumble on oil attacks, Brexit uncertainty

* Bond yields tumble after attacks on Saudi oil facilities

* Brexit uncertainty also weighs

* ECB won’t hit bond buying limits for some time- Lane (Updates prices for late trade, adds quotes, U.S. data)

By Yoruk Bahceli

LONDON, Sept 16 (Reuters) - Bond yields in the euro zone’s higher-rated debt markets tumbled on Monday as attacks on Saudi Arabia’s crude facilities and uncertainty over the chances of British Prime Minister Boris Johnson securing a new Brexit deal boosted safe-haven assets.

Long-dated bond yields in Germany, France and the Netherlands hit six-week highs at the end of last week on doubts over whether the European Central Bank’s new stimulus measures can boost a sluggish economy.

But those moves kicked into reverse on Monday after an attack on Saudi Arabia which shut 5% of global crude output caused the biggest surge in oil prices since 1991. U.S. officials blamed Iran and President Donald Trump said Washington was “locked and loaded” to retaliate.

Brexit uncertainty added to the safety bid in top-rated bond markets.

British Prime Minister Boris Johnson said on Monday a Brexit deal is not yet “in the bag”, speaking after a meeting with European Commission President Jean-Claude Juncker in Luxembourg.

“Oil is the predominant market driver globally with an added contribution from the ebb and flow from Brexit tensions,” said Richard McGuire, head of rates strategy at Rabobank.

Most longer-dated euro zone government bond yields were down 4 basis points .

Germany’s 30-year bond yield was down 4 bps at 0.05%, edging back towards negative territory after rising during last week’s sell-off. German 10-year bond yields DE10YT-RR were down 2.5 bps at -0.48%.

While higher oil prices usually boost inflation expectations and bond yields, analysts said the impact of the jump in oil prices was being offset by geopolitical risks and concern that soaring oil prices will hurt world economic growth.

“If oil prices remain elevated, at the very least because of a political risk premium now that the vulnerability of Saudi oil production has been laid bare, any impact on inflation will be of the wrong sort,” Rabobank’s McGuire said.

“Any higher spot inflation on purely cost push is only going to squeeze consumers’ pockets,” he added.

Weak economic data from China, where industrial production grew at its weakest pace in 17-1/2 years in August, added to the bounce in bond markets.

The New York Federal Reserve said its gauge of business growth in New York state declined more than forecast in September.

The Bond market also continued to digest the implications of last week’s ECB stimulus package that included rate cuts, open-ended asset purchases and steps to offset the negative side effects of sub-zero rates on banks.

ECB Chief Economist Philip Lane said on Monday the decision to buy 20 billion euros of bonds a month should allow it to run for an “extended period of time” before reaching self-imposed limits.

The ECB’s policy action was needed to combat low inflation, Governing Council member Pierre Wunsch was quoted as saying.

“There is still a bit of uncertainty in the market about the implications of the ECB measures,” said Commerzbank rates strategist Rainer Guntermann. (Reporting by Yoruk Bahceli; Additional reporting by Dhara Ranasinghe, Editing by Kim Coghill and Ed Osmond)

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