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Oil rise and taper talk keep German yields near one-month high
October 11, 2016 / 8:11 AM / 10 months ago

Oil rise and taper talk keep German yields near one-month high

LONDON, Oct 11 (Reuters) - Europe's benchmark bond yield held near a one-month high on Tuesday after an inflation-boosting rise in oil prices coincided with more hints that central bankers were rowing back on monetary easing.

German 10-year yields dipped slightly from Monday's peak, but strategists saw little room for further falls with yields on other bond benchmarks in the U.S. and Japan at four-month and three-week peaks, respectively.

Brent crude struck a one-year high on Monday after Russia said it was ready to join a group of oil producers planning to curb oil output.

This signals a potential boost to inflation that would take the heat off central banks struggling to lift consumer prices with ultra-low rates and bond-buying purchase programmes.

After a recent Bloomberg report that a consensus is growing among European Central Bank policymakers to eventually scale back or "taper" purchases, Governing Council member Ignazio Visco said on Monday that any exit would largely depend on economic data.

Meanwhile, Bank of Japan Governor Haruhiko Kuroda said on Sunday that its bond buying could be reduced considerably under a new framework adopted last month, while the U.S. Federal Reserve is broadly expected to raise rates for just the second time in a decade later this year.

"The bearish trend is your friend," wrote Societe Generale strategists in a note on Tuesday.

"Concerns about central banks turning the corner are growing... and hurting bonds. The...rise in oil prices only added to the bond misery."

German 10-year bond yields edged down 1 basis point to 0.05 percent on Tuesday, coming off Monday's 0.06 percent level, which was the highest since September 15.

A key market measure of long-term inflation expectations in the euro zone -- the five-year, five-year breakeven forward rate -- is holding near its highest level since June.

Japanese bond yields earlier climbed 2 bps to hit minus 0.05 percent for the first time since Sept. 23, while U.S. equivalents climbed 4 bps to hit 1.77 percent, the highest since June 3.

The U.S dollar hit an 11-week high against a basket of other major currencies, as money market prices suggested a 70 percent chance that the Federal Reserve will hike interest rates at its Dec. 13-14 meeting, according to CME Group's FedWatch tool.

On the data front, euro zone analysts were waiting for a ZEW survey of German investor sentiment 1000GMT for further signs of confidence in the bloc's biggest economy.

Economists polled by Reuters expect economic sentiment to have risen modestly to 4.3 in October from 0.5 in September.

Analysts at Commerzbank said that while this would not necessarily be a signal of reviving growth, "it may further sour market sentiment in Bunds". Commerzbank expects Bund yields to rise towards 0.08 percent, the highest seen since Britain's vote to leave the EU in mid-June.

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 (Editing by Raissa Kasolowsky)

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