Static ECB, oil price bounce push Bund yields above 0.20 percent

* Oil at five-month highs as oversupply fears ease

* Firm euro keeps inflation expectations subdued

* ECB holds interest rates, defends independence

(Updates with ECB reaction)

By Marius Zaharia and Dhara Ranasinghe

LONDON, April 21 German Bund yields rose above
0.20 percent on Thursday as oil prices hit a five-month high and
ECB President Mario Draghi used his regular news conference to
defend his recent easing measures rather than talk about new
ones.

German yields were already up sharply before Draghi started
speaking as oversupply concerns in the oil market eased,
supporting the outlook for inflation and investor appetite for
riskier assets.

By the time Draghi finished, they were even higher and the
euro currency was stronger. He said the ECB’s policy was working
and brushed off German criticism of his ultra-loose monetary
policy.

Reflecting the market’s lack of confidence in how efficient
the ECB policy is, the five-year, five-year breakeven forward
– which shows where investors expect 2026
inflation forecasts to be in 2021 – lingered around 1.4 percent,
far below target.

“Given the fall in inflation expectations and the stronger
euro, I would have expected Draghi to be more open to more
expansionary measures,” said Norbert Wuthe, rate strategist at
Bayersiche Landesbank.

“But perhaps that would have been damaging so soon after the
March easing package.”

Last month, the ECB cut interest rates deeper into negative
territory and boosted its asset-purchasing programme by a third
to 80 billion euros a month.

German Bund yields were up 7 basis points on
the day at 0.216 percent, one of the biggest daily rises this
year. It rose as high as 0.24 percent as Draghi spoke.

Having come close earlier this month, Bund yields are
pulling away from last April’s 0.05 percent record low, hit
before one of the biggest Bund sell-offs took yields above 1
percent in a matter of weeks.

The approaching anniversary of that sell-off, which started
at the end of April 2015 and quickly snowballed in May, is
keeping investors wary of making firm bets on Bunds.

What happens to oil prices will probably determine whether
Bunds test zero again. The bond market is tracking developments
in oil prices because of their impact on inflation and worries
that cheap crude can hurt the energy sector and its lenders,
taking a toll on the global economy.

Oil touched a five-month high on Thursday after the
International Energy Agency said 2016 would see the biggest
decline in non-OPEC production in a generation, helping
rebalance a market dogged by oversupply.

Most other euro zone bond yields were up in line with Bunds,
while money markets barely moved. Forwards Eonia rates still
suggest a 70-80 percent chance of another cut in the ECB’s
deposit rate by the end of the year.

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Source URL:http://www.reuters.com/article/eurozone-bonds-idUSL5N17O5GY

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