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Bonds News

Falling oil prices push Bund yields to lowest since last ECB meeting

* Bund yields hit 0.47 percent, lowest since Dec. 3

* Oil prices, slowdown in China key concerns

* ECB sees scope for further rate cuts

* Spain, Portugal and Slovakia all sell bonds (Adds details on auctions, ECB minutes)

By Marius Zaharia

LONDON, Jan 14 (Reuters) - German Bund yields hit their lowest levels since the European Central Bank’s December meeting on Thursday, after oil prices fell below $30, pinning long-term inflation expectations in the euro zone at 3 1/2 month lows.

Benchmark Brent crude dropped to 12-year lows of $29.73 as the prospect of more supply from Iran loomed.

Free-falling oil prices and concerns over a slowdown in China have allowed euro zone bonds to withstand the traditional start-of-the year supply pressure as state treasuries take advantage of cash-rich investors opening their books again.

“The big theme is the stock market and China-related uncertainty and the decline in oil prices that is depressing inflation expectations,” said Jussi Hiljanen, SEB’s head of fixed income research.

“The bad thing is there is not any light at the end of the tunnel in the short-term at least.”

German 10-year Bund yields, the benchmark for euro zone borrowing costs, hit 0.471 percent, their lowest since Dec. 3, when the ECB eased monetary policy.

Spain sold 4.3 billion euros in 2018, 2020 and 2023 bonds, with yields on the longest-dated paper nudging up at the first bond auction since an inconclusive general election on Dec. 20.

No single party won a majority in the election, which saw traditional left and right parties cede seats to newcomers, while sticky subjects such as Catalan independence have complicated the formation of alliances.

Nevertheless, analysts said it was a decent result given that Madrid sold 9 billion euros of 10-year bonds in a syndicated debt deal on Tuesday and plans to hold another auction next week.

“That’s a really good start for the treasury despite the political situation,” said Cyril Regnat, fixed income strategist at Natixis. “The market context is very supportive for European bonds: oil prices are down and there’s higher risk aversion.”

Bonds worth 34 billion euros were issued by Germany, Austria, The Netherlands, Spain, Italy and Belgium on Tuesday and Wednesday. Portugal was set to sell 4 billion euros of a 10-year bond, while Slovakia was selling 1 billion euros of 15-year paper on Thursday -- both via syndicates of banks.

PERSISTENTLY LOW

The ECB’s favoured measure of inflation, the five-year, five-year euro zone breakeven forward rate, traded near its lowest since early October at about 1.60 percent.

The measure, which shows where markets expect 2026 inflation forecasts to be in 2021, has fallen about 20 basis points since the ECB’s last meeting in early December. Then, it disappointed markets with a 10 basis point cut in its deposit rate, to -0.3 percent, and a six-month extension of its bond-buying programme.

A similar inflation measure in the United States has fallen 20 bps this year alone due to oil prices and as some in the market question whether last year’s rate hike was premature. It now trades just above 2 percent.

Markets do not expect the ECB to ease monetary policy further next week, but are pricing in a 50 percent chance of another cut in the deposit rate from minus 0.30 percent in March A cut by the end of the year is fully priced in.

Many ECB policymakers are sceptical about the need for further policy action in the near term, according to an exclusive Reuters report based on conversations with five of them.

Yet minutes from the ECB’s December meeting released on Thursday showed the bank sees scope for further cuts to its deposit rate as inflation risks missing its already lowered forecasts.

“The ECB staff forecasts suppose an oil price of over $52 a barrel this year,” Societe Generale rate strategists said in a note. “If the oil price stays low, i.e. under $50, we can’t see any alternative but for the Council to consent to additional easing on March 7.” (Editing by Catherine Evans)

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