Euro zone bond yields dip as US inflation drops in 6 years

Euro zone bond yields dipped near record lows on Tuesday after U.S. inflation recorded its biggest drop in six years and investors waited to hear the latest thinking on when the world’s largest economy might raise interest rates.

Uncertainty remains as to whether the U.S. Federal Reserve will drop its “considerable time” pledge on keeping interest rates near zero from its policy statement due at 1900 GMT.

But hints that weak consumer prices might strike some caution, as well as prompting further stimulus from the euro zone, overshadowed a brewing financial crisis in Russia and a crucial presidential vote in Greece.

“You’ve got a global disinflationary backdrop that will be difficult for the US to disentangle itself from… clearly one part of the Fed’s mandate is going the wrong way,” said Lyn Graham-Taylor, a strategist

at Rabobank which thinks the Fed will leave in the “considerable time” statement.

German 10-year yields dipped 1 basis point to 0.59 percent, having matched a record low of 0.566 percent earlier in the day.

Italian equivalents were 2 bps lower at 1.98 percent while Spain’s were flat at 1.79 percent, just above record lows.

Even yields on Greek bonds – shaken by political upheaval in recent weeks – dipped some 25 bps to 8.89 percent.

The first of three rounds of a presidential vote later in the day that will determine whether the country is forced into snap elections that could slingshot a leftist anti-bailout party into power.

Analysts see the government’s decision to bring forward the presidential election as a risky gambit that Prime Minister Antonis Samaras hopes will provide a fresh mandate for his government, but which could easily plunge the country into renewed political turmoil.

A steep fall in oil prices also saw one of the European Central Bank’s favoured market measures of inflation expectations hit a new low on Wednesday, compounding pressure on the bank to announce more stimulus measures in January.

The five-year five-year breakeven forward – which shows where five-year inflation will be in five years’ time – hit 1.5977 percent, well below the ECB’s target inflation rate of just below 2 percent.

The two-year inflation swap rate, as quoted by ICAP, turned negative late yesterday.

“The whole universe of market-based inflation measures is collapsing and printing new lows which makes QE more likely,” said Commerzbank strategist Michael Leister. (Reuters)