Eurozone government bond yields moved lower on Wednesday as a sharp fall in global oil prices eased concerns about inflationary pressure stemming from Middle East supply risks.
The decline in crude provided support for European fixed-income markets despite fresh hawkish signals from European Central Bank policymakers suggesting that interest rates may need to remain restrictive.
Germany’s two-year Schatz yield slipped to 2.781%, while the benchmark 10-year Bund yield declined to 3.195%. The latter moved back below the closely watched 3.20% level after trading near 15-year highs last week.
Ceasefire hopes trigger further oil price decline
Brent crude fell by more than 2.5% to around $86 a barrel, extending losses from recent sessions.
The decline followed media reports suggesting that the US and Iran are moving closer to an interim ceasefire agreement that would include guarantees for unrestricted transit through the Strait of Hormuz.
Expectations that maritime traffic could resume more freely through the strategically important waterway reduced immediate concerns about energy supplies.
The resulting decline in oil prices also eased some of the cost-driven inflation premium that had built into European interest-rate markets during recent weeks.
Schnabel’s hawkish comments limit bond rally
The decline in yields was contained by comments from European Central Bank Executive Board member Isabel Schnabel, who signalled that additional monetary tightening may be required to bring inflation sustainably back to target.
In an interview with Bloomberg News published on Wednesday, Schnabel said that “at the current policy rate, inflation is unlikely to return to target over the medium term, and therefore further tightening will be necessary.”
She also pointed to continuing tensions in the Middle East and resilience across the Eurozone economy as factors that could create further upside risks for consumer prices.
The comments reinforced expectations in money markets that the ECB could raise rates by 25 basis points in September. That prospect prevented a larger decline in European borrowing costs and kept shorter-dated yields relatively supported.
Bond markets turn attention to Jackson Hole
With Eurozone yields moving below their recent highs, investors are now preparing for another major monetary policy event later this week.
Federal Reserve Chair Kevin Warsh is scheduled to deliver his inaugural keynote address at the Jackson Hole Economic Policy Symposium on Friday.
Fixed-income markets will scrutinise his remarks for indications of whether the Federal Reserve intends to maintain relatively restrictive interest rates.
Any signal that US monetary policy will remain tighter for longer could influence European bond markets as well, potentially shaping sovereign yields and spreads heading into the autumn.
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