German bunds rise modestly following weak oil prices; 10-year yield approaches zero first time in 2 weeks

The German bunds traded modestly firmer Thursday as investors booked profits from earlier bets. Also, trading volumes remained thin as a weeklong holiday break continued in China, the region’s largest oil consumer.

The yield on the benchmark 10-year bond, which moves inversely to its price, fell 1-1/2 basis points to -0.023 percent, the yield on long-term 30-year note dipped ½ basis point to 0.595 percent and the yield on short-term 2-year bond remained steady at -0.67 percent mark by 08:10 GMT.

The German bonds have been closely following developments in oil markets because of their impact on inflation expectations. Crude oil prices decline as investors cashed in profit after relishing previous gains. The International benchmark Brent futures fell 0.54 percent to $51.59 and West Texas Intermediate (WTI) also dipped 0.82 percent to $49.42 at 08:20 GMT.

Moreover, the ECB will probably taper its bond purchases when the time comes, according to unnamed central bank officials cited by Bloomberg. The report doesn't say when this may start happening, but refers to its being done in increments of 10 billion Euros per month. The decision will depend on the economic outlook, as well as how the ECB addresses the scarcity of assets to buy.

The idea of eventual tapering is natural, but this report may raise speculation about whether the current QE pace of 80 billion Euros per year (since last March) may be reduced as soon March 2017, which would be earlier than expected.

Following the Bloomberg story, ECB tapering fears (which we believe are unfounded -- see separate article), the 10-year German yield has shot up to zero for the first time in two weeks. While 0.0 percent is a natural point for reflection, there is nothing to stop the yield from extending as high as its September high of 0.08 percent. That's particularly if solidifying Fed tightening prospects (watch the US employment report on Friday) push Treasury yields up further too. So far, the 10-year T-note/Bund spread has narrowed only slightly to about 172 basis points, though.

Meanwhile, the German stock index traded 0.04 percent higher at 10,591 by 08:20 GMT.