Eurozone bond yields edge lower on oil uncertainty

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Core longer-dated eurozone bond yields edged lower on Monday as attacks on Saudi Arabia’s crude facilities and poor data from China bolstered demand for safe-haven assets.

Bond yields are declining again after hitting six-week highs last week, as doubt was cast on the impact new stimulus measures announced by the European Central Bank could have on the eurozone’s sluggish economy.

Oil surged to four-month highs on Monday after weekend attacks on crude facilities in Saudi Arabia sparked supply fears, shutting down five percent of world production.

Most longer-dated core eurozone government bond yields were down one to two basis points (bp).

Germany’s 10-year benchmark was down one bp at -0.46 percent. Bund futures rose 22 ticks at the start of trade.

“The bund futures are slightly up; you can interpret this in two ways. If there is growing uncertainty between Iran and Saudi Arabia, this could trigger safe haven flows,” said DZ Bank rates strategist Daniel Lenz.

Should investors focus on the rise in oil prices and its potential impact on raising inflation, it could put fixed income assets under pressure, however.

Adding to uncertainty was renewed evidence of the slowdown in China, with industrial production growing at its weakest pace in 17.5 years. Retail sales and investment gauges also worsened, reinforcing views that China is likely to cut some of its key interest rates this week for the first time in over three years to prevent a sharper slump in activity.

“Spikes in oil prices when the global economy is already flirting with the idea of recession is not ideal and, if repeated and sustained, could ultimately be what tips us over the edge,” OANDA senior market analyst Craig Erlam wrote in a client note.

Meanwhile, Portugal’s 10-year bond is underperforming, with the yield up two bps after S&P raised the outlook on the sovereign’s BBB rating to positive on Friday.

“There was no rating upgrade, so there is still some gap between Portugal and Spain, so markets could try to reflect this, as Portugal is (still) not as good as Spain,” said DZ Bank’s Lenz.

The gap between Portugal and better-rated Spain’s 10-year bond yields hit a record low of negative five basis points last week.

Focus will remain on the ECB on Monday, with policymakers Francois Villeroy de Galhau, Philip Lane and Sabine Lautenschlaeger all due to speak.