Falling inflation expectations keep euro zone yields near multi-month lows
Many euro zone government bond yields were close to multi-month lows on Thursday as falling oil prices added to concerns about inflation and whether the European Central Bank would be able to tighten policy any time soon.
Triggered by Wednesday’s sharp fall in oil prices, a key gauge of long-term euro zone inflation expectations closed in on 1.50 percent for the first time this year, well off its February peak of 1.80 percent.
This raises further doubts about the ECB’s ability to meet its inflation target of just below 2 percent, analysts said.
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“It’s not good news for the ECB and it maybe reinforces expectations that Draghi can’t get inflation back on target, a problem in the U.S. as well at the moment,” said ING strategist Martin van Vliet.
“At the end of the day, if inflation is not reviving, the ECB needs to keep a loose policy stance, which helps the periphery in particular.”
Lower-rated southern European government bonds are seen as the biggest beneficiaries of the ECB’s bond buying scheme. Italian and Spanish 10-year borrowing costs were both down 2 basis points on Thursday, both close to multi-month lows.
These bonds have also benefited from a reduction of political risk in Italy, after the possibility of a snap election faded and anti-establishment party 5-Star Movement suffered a beating in local votes.
But many higher-rated euro zone government bond yields are not far off recent lows either. Germany’s 10-year yield , the benchmark for the region, shed a basis point on Thursday to trade at 0.25 percent, not far from a one-month low of 0.225 percent hit last week.
French and Belgian 10-year borrowing costs are also close to their lowest levels of 2017.
“Central bankers would have thought that after a year weakeness in oil would have been washed away but you can see in the market that market-based inflation expectations move closely with oil prices, for instance the five-year, five-year forward in Europe,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.
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Oil turned lower on Thursday after posting gains earlier in the session as traders looked ready to test new lows for crude prices with worries persisting over a global glut.
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