Bunds rise as Iran deal fuels speculation ECB may ease further

Mon Nov 25, 2013 12:21pm EST

Related Topics

* ECB policymakers say ECB could ease policy further

* World powers reach deal with Iran to curb nuclear activity

* Iran deal sends oil prices lower, fuels disinflation talk

By Marius Zaharia and Ana Nicolaci da Costa

LONDON, Nov 25 (Reuters) - German Bunds rose on Monday after ECB policymakers said there was room for more rate cuts as the prospect of lower oil prices following a deal to curb Iran's nuclear activity reinforced a low inflation outlook.

European Central Bank Governing Council member Ardo Hansson was quoted as saying the options on rate cuts were "still not fully exhausted" and the bank could move by less than the usual 25 basis points.

His French colleague, Christian Noyer, said interest rates had to stay low for an extended period and might go even lower if needed as officials try to ensure the euro zone does not fall into deflation.

German Bund futures settled 37 ticks higher on the day at 141.32, pushing 10-year yields 2.8 basis points lower to 1.73 percent.

"The market is moving on any comment (from the ECB). The interpretation is that it's clear that there is a strong faction within the ECB that is open to a deposit rate cut," said Daniel Lenz, lead market strategist for the euro zone at DZ Bank.

"The outlook for stable oil prices ... is another argument for the ECB to continue its current stance."

Brent crude fell by as much as $3 a barrel on Monday, before paring losses, as a breakthrough nuclear deal between world powers and Iran over the weekend raised expectations of an increase in supply.

The prospect of lower oil prices and, by extension, tamer inflation reinforced the case for more ECB action at a time when there are worries in the market about deflation.

A surprise fall in annual inflation for October to 0.7 percent, well below its target of just under 2 percent, prompted the ECB to cut rates this month. Inflation data for November is due on Friday and is forecast at 0.8 percent, according to a Reuters poll.

"Bunds are up on oil prices being deflationary, Hansson saying there is room to cut again," one trader said.

Ten-year French government bond yields fell 2.1 basis points to 2.19 percent, while the Austrian equivalent eased 2 bps to 2.08 percent.

"Having lower oil prices should be a boost for growth," ING rate strategist Alessandro Giansanti said. "But on Bunds the impact should be very limited as they are very sensitive to action from central banks."

Uncertainty about the ECB outlook and about the timing of any reduction in the Federal Reserve's bond-buying stimulus was likely to keep Bunds in tight ranges in coming days, he said.

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