European bonds slump ahead of ECB meeting, firm oil prices

The European bond prices slumped on Thursday as investors awaits European Central Bank (ECB) monetary policy meeting. A recovery in oil prices after Energy Information Administration's (EIA) showed that crude stock rose lower than the market expectation, has helped shore up concerns about a slowdown in the global economy and the outlook for inflation.

The benchmark German 10-year bonds yield, which is inversely proportional to bond price rose 32.67 pct to 0.199 pct, French 10-year bunds yield jumped 9.13 pct to 0.540 pct, Italian equivalents climbed 4.0 pct to 1.450 pct, Spanish 10-year bonds yield inched up 4.44 pct to 1.6 pct and British 10-year gilts yield rose 4.04 pct to 1.544 pct, Netherlands 10-year bonds yield inched higher 13.59 pct to 0.419 pct and Portuguese 10-year bonds yield climbed 1.05 pct to 3.178 pct by 0900 GMT.

The ECB is expected to keep policy unchanged in the coming months in spite of Draghi’s soft words, while the central bank waits to see the impact of its recent policy initiatives, said Danske Bank in a note. Buying of corporate bonds and the first TLTRO II auction will not begin until June. This, for some time will keep the ECB sidelined.

The European Central Bank is likely to extend its buying of QE after March 2017 as inflation is unlikely to accelerate enough for the central bank to keep policy on hold, according to Danske Bank.

“We do not expect additional rate cuts, but a strong appreciation of the effective euro could force the ECB to cut again”, added Danske Bank.

The Eurozone government bonds have been closely following developments in oil markets because of their impact on inflation expectations and stock market sentiments, which are well below the European Central Bank's target. Today, Crude oil prices jumped to 5-month high as Energy Information Administration's (EIA) showed that crude stock rose lower than the market expectation last week. The crude inventories rose 2.1 million barrels, from prior build of +6.6 million barrels for the week ending 15 April. This came alongside a decreases seen in gasoline inventories of -0.1million barrel, from prior -4.2 million barrel and distillate inventories of -3.6 million barrel, as compared to a build of +0.5 million barrel seen prior. Moreover, Market speculation that Petroleum Exporting Countries (OPEC) and Russia will meet in Moscow next month to again strike a deal on oil output freeze, boosted crude oil investors confidence. But, Russian Energy Minister Alexander Novak denied about any such meeting happening in Russia in May.

On Sunday, the negotiations between Petroleum Exporting Countries (OPEC) and Russia failed to reach an agreement in the Doha round of talks to strike a deal on oil output freeze. The International benchmark for crude oil prices, Brent futures rose 0.17 pct to $45.85, while West Texas Intermediate crude oil jumped 0.20 pct to $44.27 by 0820 GMT.

Meanwhile, the pan-European STOXX 600 index fell 0.20 pct and the euro-are blue-chip gauge, the STOXX 50, jumped 0.32 pct. The FTSE 100 Index is down 0.32 pct, the DAX trading 0.29 pct higher and the CAC-40 rose 0.02 pct by 0900 GMT.