LONDON: Eurozone bond yields edged to just above record lows on Monday, as plunging oil prices bolstered expectations the ECB will soon do more to stimulate the region’s economy, including purchase sovereign bonds.
Oil’s fall to 5 1/2-year lows has served to justify bets the ECB will take steps to fight off deflation, which inflation swap rates signal could set in over the next year.
Two-year rates are dangerously close to zero.
“If the oil price shifts medium-term inflation expectations, it just increases the prospect of more ECB easing,” said Anton Heese, co-head of European interest rate strategy at Morgan Stanley.
This does not bode well for many of the Eurozone’s highly indebted members. Fitch on Friday became the latest credit agency to take a dim view of France’s deficit and debt reduction plans, cutting its ratings to AA from AA+.
German and French yields — the two main benchmarks for Eurozone debt — both edged up 2 basis point to 0.64 and 0.91 per cent respectively, just above lows hit last week.
Italian and Spanish equivalents — considered bellwethers for the bloc’s fragile southern periphery — were a touch higher at 2.08 and 1.89 per cent.
While the oil slump will hurt the bloc’s energy-exporting trade partners, it could also — as the ECB hopes — boost domestic spending. Investors will, therefore, keep a close eye on preliminary factory and services output data due on Tuesday.
“We look for modest improvement in the composite reading on the back of a combination of lower oil prices and weaker exchange rate contributing to an improvement in confidence,” said RBC in a note to clients.
Before that, the ECB will announce its weekly asset purchases later on Monday.
With tepid demand for the ECB’s bank loans last week, the running expectation is the central bank will need to expand this purchase scheme to boost its balance sheet by a planned one trillion euros.
