Oil slump, determined Draghi halts eurozone bond sell-off

A sell-off in eurozone bonds kicked into reverse on Monday as oil prices tumbled and ECB president Mario Draghi said he stood ready to deploy further stimulus to achieve the central bank's inflation target. German 10-year bond yields - the bloc's benchmark - fell 8 basis points to 0.61 percent, erasing some of the 25 bps rise seen after Draghi announced a package of stimulus measures on Thursday including a rate cut and an extension of bond-buying that fell short of market expectations.
An Opec decision to keep oil output high, which sent the price of crude to its lowest in almost seven years, combined with a pledge from Draghi on Friday to deploy further tools to revive consumer price growth, appears to have helped stop the rot. Most other euro zone yields were down around 4-8 bps.
"The consensus should still be that the ECB remains ready to act, and for some investors this increased yield level obviously represents a buying opportunity," DZ Bank strategist Christian Lenk, said. A disagreement between Saudi Arabia and Iran meant that Opec on Friday failed to agree on output targets to reduce a bulging glut in oil. This has worn on the market's long-term inflation expectations, already dented by the disappointment of Draghi's stimulus package announced last week. The 5-year/5-year breakeven forward, cited by the ECB as one of its favoured gauges of inflation expectations, has fallen below 1.70 percent for the first time in six weeks, edging away from the ECB's near two percent target.
Conservative central bankers at the ECB have criticised Draghi for raising market expectations too high for a big injection of money last week. But brushing off concerns of the negative reaction, Draghi said on Friday the bank was ready to ease its policy further if needed to raise inflation back towards its target. Consumer prices in the euro zone are currently growing at only 0.1 percent year-on-year, while weaker-than-expected German industrial output data on Monday underlined other risks facing the bloc's economy.
The fragile outlook for global inflation has also helped ease nerves about the future path of interest rates in the United States despite solid jobs data on Friday that has cemented bets that the Federal Reserve will raise rates later this month. Federal Reserve Chair Janet Yellen has the evidence of US labour market health she wanted in order to raise rates for the first time in a decade, but she may have a tougher time selling further hikes next year.