European bonds climb on weak crude prices

The European bonds strengthened on Monday as decline in oil price pushed investors’ inflation expectations lower and supported demand for fixed-income assets. Also, ECB executive board member and chief economist Praet dovish comments drove investors towards safe-haven buying. The benchmark German 10-year bonds yield, which moves inversely to its price fell 2bps to 0.156 pct, French 10-year bunds yield dipped 3bps to 0.492 pct, Irish equivalents inched lower 1bp to 0.836 pct, Italian equivalents tumbled 1bp to 1.473 pct, Netherlands 10-year bonds yield down 1bp at 0.370 pct, Portuguese 10-year bonds yield slumped 5bps to 3.079 pct, Spanish 10-year bonds yield hovered at 1.571 pct and British 10-year bonds yield fell 1bp to 1.446 pct by 0855 GMT.

The European bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the European Central Bank's target. Today, crude oil prices fell on firm global supply, a stronger dollar and surging output from Iran to Europe and Asia. Moreover, Iranian deputy oil minister quoted that Iran plans to increase oil export capacity to 2.2 million barrels by the summer and has no plans to freeze its level of oil production and export. The International benchmark Brent futures fell 0.72 pct to $49.16 and West Texas Intermediate (WTI) dipped 1.08 pct to $48.68 by 0540 GMT.

Moreover, the ECB executive board member and chief economist Praet in an interview said that very low inflation in the presence of economic slack is a 'dangerous cocktail' and the risks of de-anchoring inflation expectations have increased but this hasn't happened yet. He further added that interest rates are still in the toolbox, though at some point negative rates have important side effects, namely on bank profitability. We foresee that the ECB may trim the deposit rate by 10bps in September meeting due to too-low inflation.

Meanwhile, the pan-European STOXX 600 index was up 0.33 pct and the euro-area blue-chip gauge, the STOXX 50 climbed 0.10 pct. The FTSE 100 Index rose 0.11 pct, the DAX trading 0.42 pct higher and the CAC-40 down 0.06 pct by 0855 GMT.