German Yield Curve Flattens as Oil Weighs on Inflation Outlook

The yield difference between Germany’s 10- and 30-year government bonds shrank to the narrowest level since November as oil headed for its third weekly decline, helping add to deflationary pressure.

With the outlook for euro-area inflation dwindling, longer-dated German bunds are outperforming, reducing the extra yield they offer over shorter maturities, known as flattening the yield curve. Crude oil prices languishing around a seven-year low make it tougher for the European Central Bank to lift inflation to its target of just below 2 percent.

Euro-region sovereign securities advanced for a second day on Friday. Bonds benefit from slow inflation because that helps preserve the value of the fixed-income payments offered by debt.

“Oil prices have resumed their decline,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. While he expects inflation in the euro region to climb in the first quarter of 2016, Daheim said there was a risk that “oil prices don’t recover. Then you will probably see a surge in dovish rhetoric by the ECB and that should dampen” any uptrend in longer-dated bund yields.

Germany’s 10-year bund yield fell five basis points, or 0.05 percentage point, to 0.55 percent as of 4:23 p.m. London time. The 1 percent security due in August 2025 rose 0.485, or 4.85 euros per 1,000-euro ($1,085) face amount, to 104.235. Yields on the nation’s 30-year bonds dropped five basis points to 1.31 percent. That left the spread at 75 basis points, the lowest since Nov. 2 based on closing prices.

Yields on Italian 10-year securities fell six basis points to 1.57 percent, while those on similar-maturity Spanish bonds declined five basis points to 1.69 percent.