November 25, 2013 / 12:23 PM / 4 years ago

Bunds rise as Iran deal fuels speculation ECB may ease further

* 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

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 after a deal to curb Iran’s nuclear activity added to worries about low inflation.

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.

Iran’s deal with six world powers to curb its nuclear programme in exchange for some relief from crippling international sanctions further fuelled concerns about rapidly falling inflation.

Brent crude fell as much as $3 a barrel before paring losses as easing Middle East tensions cooled concerns about oil supply.

While lower oil prices - if sustained - could increase spending power globally and boost economic growth, the Bund market’s immediate focus was on the impact the deal might have on inflation.

Bund futures, which usually fall on prospects of better economic growth as investors switch into riskier, higher-yielding assets, rose 31 ticks to 141.26 on Monday, even as European shares firmed. [.EU[

“The outlook for stable oil prices ... is another argument for the ECB to continue its current stance,” said Daniel Lenz, lead market strategist for the euro zone at DZ Bank.

“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.”

A surprise fall in annual inflation for October to 0.7 percent, well below a target of just less than 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.

German 10-year yields fell 2 basis points to 1.73 percent. The fall in yields countered upward pressure before a sale of up to 4 billion euros of 10-year German debt on Wednesday.

“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.

Yields on other euro zone top-rated bonds also dipped, while peripheral yields were steady.

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