Bund yields drop to one-week low as oil prices slide
By Stefano Rebaudo
Oct 15 (Reuters) -Euro area benchmark Bund yields dropped to a one-week low on Tuesday as a slide in oil prices soothed fears of renewed inflationary pressures, while investors await the European Central Bank policy meeting later this week.
Oil prices fell more than 4% on Tuesday on the back of a weaker demand outlook, and as supply disruption fears eased after a media report said Israel was willing not to strike Iranian oil targets.
Euro zone investors have recently cut their bets on ECB rate cuts, mostly tracking moves in Federal Reserve rate derivatives after strong U.S. economic data.
They expect the ECB to cut rates by 25 basis points (bps) this week without providing clear guidance about the rate outlook.
Germany's 10-year bond yield DE10YT=RR was down 5 bps to 2.22%, after hitting 2.222%, its lowest level since Oct. 7.
"This economy needs neutral rates, maybe even stimulus," said Ruben Segura-Cayuela, chief European economist at BofA.
"The ECB would take time to get to that conclusion. December forecasts might force a more earnest debate," he added.
Markets are pricing in around a 90% chance of 50 bps of ECB rate cuts by year-end. EURESTECBM2X3=ICAP.
ING still forecasts a 25 bps cut, but said there were plenty of reasons for the ECB to remain on hold on Thursday. One is the lack of hard data, as only sentiment indicators show weakening economic momentum.
Furthermore, headline inflation is still highly dependent on oil prices, which remain heavily influenced by developments in the Middle East.
Some analysts flagged that markets could boost their bets on future rate cuts if the ECB maintains its policy. This is because investors might perceive monetary policy as too tight and expect inflation to fall below target, forcing the ECB to ease policy more aggressively in the future.
Germany's two-year bond yield DE2YT=RR, which is more sensitive to ECB rate expectations, was down 4 bps to 2.22%, after hitting 2.21%, its lowest since Oct. 4.
The gap between French and German 10-year yields DE10FR10=RR - a gauge of the risk premium investors demand to hold France's government bonds - was last at 77 bps, roughly in line with the levels seen before Prime Minister Michel Barnier presented the budget bill for 2025.
Credit ratings agency Fitch revised France's outlook to "negative" from "stable" on Friday, citing increases in fiscal policy and political risks, with analysts expecting more downgrades from S&P and Moody's.
Italy's 10-year government bond yield IT10YT=RR fell 6.5 bps to 3.48%, its lowest since Oct. 3. The gap between Italian and German yields DE10IT10=RR tightened to 125 bps.
Reporting by Stefano Rebaudo; Editing by Mark Potter
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