Eurozone bond yields fall as oil plunges, debt supply soars

Eurozone yields fell on Friday as slumping oil prices eroded inflation expectations and the biggest week of debt supply in nearly three years drew to a close. Another dive in crude futures left them on track to close lower for a third consecutive week, pulling a key market gauge of long-term consumer price growth to a three month low.
This further cemented bets that the ECB will need to ease monetary policy again, which combined with relief that some 39 billion euros of bonds had been easily digested by markets this week served to push yields lower. Unscheduled debt sales from Spain, Portugal, Belgium and Slovakia this week combined with auctions pushed euro zone debt issuance to a level not matched since May 2013, according to Commerzbank, with only 32 billion euros more due by month end.
"You can have fall in yields related to supply but the bigger issue is the oil price, which is affecting long-term expectations for inflation ... which is a problem for central banks," Intesa SanPaolo strategist Sergio Capaldi said. German 10-year yields fell 4 basis points to 0.48 percent, back to levels seen before the ECB meeting on December 3 when it cut rates and extended its bond-buying scheme. All other euro zone yields were 4-6 bps lower on the day.
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 five-year, five-year forward breakeven rate , which shows where investors expect 2026 price growth forecasts to be in 2021, fell below 1.60 percent for the first time in three months on Friday.
This shows investors doubt the ECB will be able to return inflation to its target of close to 2 percent. While investors do not expect the ECB to ease policy at its meeting next Thursday, money markets are pricing in a 50 percent chance of a cut in the deposit rate from -0.30 percent in March, while a cut by the end of the year is fully priced.
There are also a brace of ratings reviews due after markets close on Friday - Standard and Poor's on Belgium and Moody's on Portugal - which some predict could result in negative outlooks emerging. "It appears the appetite for structural reforms and austerity in some countries in the euro zone is waning and this is negative from a ratings perspective," said Commerzbank strategist David Schnautz.