Bonds Climb Across Europe as Oil-Price Drop Weighs on Inflation

  • Treasuries, German bunds affected by economic-weakness concern
  • U.K. break-even rates retreat toward lowest level since March

Government bonds from the U.K. to Germany advanced as oil prices declined, weighing on the outlook for inflation and boosting demand for fixed-income assets. Treasuries also rose.

U.K. 10-year gilts climbed for the first time in five days. Oil extended losses after a government report showed U.S. crude inventories grew by the most in six months. That weighed on market expectations of inflation in the U.S. and U.K.

The subdued outlook for consumer-price growth globally has hampered the Bank of England and Federal Reserve from raising interest rates despite sustained economic growth. Britain’s 10-year breakeven rate, a measure of market inflation expectations, fell toward its lowest level since March.

“The rally is driven mostly by the fall in break-evens due to lower oil prices overnight,” said Vatsala Datta, a rates strategist at Royal Bank of Canada in London. In general “rates have really been very range-bound over recent months and we are in a waiting game right now, trying to assess how much spillover we get from global weakness into domestic economies. Until there is some clarity on that front, it is hard to see any selloff in rates especially as inflationary pressures are non-existent.”

The yield on 10-year gilts fell five basis points, or 0.05 percentage point, to 1.80 percent as of 4:40 p.m. London time. The 2 percent security due in September 2025 rose 0.485, or 4.85 pounds per 1,000-pound ($1,545) face amount, to 101.785. Yields of benchmark Treasuries fell four basis points to 2.03 percent.

Bund Yield

The 10-year German bund yield dropped six basis points to 0.57 percent, after climbing eight basis points in the previous two days. Germany sold two-year notes at a yield of minus 0.26 percent Wednesday. The nation received bids of more than 6 billion euros ($6.8 billion) versus a sales goal of 4 billion euros.

Brent, the European benchmark crude, declined 0.6 percent to $48.40 a barrel, after dropping as much as 2.5 percent. West Texas Intermediate oil futures for December delivery declined 1.3 percent to $45.70 a barrel.

The U.K. 10-year break-even rate, derived from the yield difference between gilts and index-linked securities, dropped two basis points to 2.4 percentage points. It slid to as low as 2.36 percentage points on Oct. 15, the least since March.

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