German 10-year bund yields hit highest since January as rally in oil prices boost inflation expectations

The German 10-year bund yields hit highest since January on Monday as investors moved away from safe-haven buying amid rising crude oil prices that lifted inflation expectations. Also, investors await the Federal Reserve’s last monetary policy decision for 2016, which is scheduled to be released on Wednesday by 19:00 GMT.

The yield on the benchmark 10-year bond, which moves inversely to its price, rose 4-1/2 basis points to 0.40 percent, the long-term 30-year bond yield climbed 8 basis points to 1.23 percent and the yield on short-term 2-year bond bounced 1-1/2 basis points to -0.74 percent by 08:50 GMT.

The German bunds have been closely following developments in oil markets because of their impact on inflation expectations. Crude oil prices jumped more than 4 percent after OPEC and non-OPEC countries agreed to cut production for the first time since 2001. The International benchmark Brent futures rose 5.14 percent to $57.12 and West Texas Intermediate (WTI) climbed 5.22 percent to $54.18 by 08:50 GMT.

Moreover, the European Central Bank in its last week’s final monetary policy decision of 2016 reduced the pace of its monthly bond-buying to 60 billion Euros from 80 billion, but extended the programme by nine months (April-October). The central bank reiterated that quantitative easing (QE) will run until inflation's path is in line with its goal. Also, noted that it may increase the size or duration if needed.

We would describe this tapering decision as more hawkish than the expected extension of the current pace of quantitative easing by 6 months.

The Federal Reserve is expected to increase the target range of the key interest rate by 25 basis points to 0.50 percent to 0.75 percent on December 14, with a unanimous decision. Little change to the statement, though the Committee is likely to acknowledge that market-based measures of inflation compensation have risen further.

Meanwhile, the German stock index DAX Index traded 0.33 percent lower at 11,167 by 09:00 GMT. While at 09:00 GMT, the FxWirePro's Hourly Euro Strength Index stood neutral at -39.66 (lower than -75 represents a bearish trend).