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Euro zone bond yields tumble on oil attacks, Brexit uncertainty

Credit: REUTERS/KAI PFAFFENBACH

Bond yields in the euro zone's higher-rated debt markets tumbled on Monday as attacks on Saudi Arabia's crude facilities and uncertainty over the chances of British Prime Minister Boris Johnson securing a new Brexit deal boosted safe-haven assets.

By Yoruk Bahceli

LONDON, Sept 16 (Reuters) - Bond yields in the euro zone's higher-rated debt markets tumbled on Monday as attacks on Saudi Arabia's crude facilities and uncertainty over the chances of British Prime Minister Boris Johnson securing a new Brexit deal boosted safe-haven assets.

They had hit six-week highs last week amid doubts over whether new stimulus measures announced by the European Central Bank could boost the euro zone's sluggish economy.

An attack on Saudi Arabia that shut 5% of global crude output caused the biggest surge in oil prices since 1991. U.S. officials blamed Iran and President Donald Trump said Washington was "locked and loaded" to retaliate.[nL5N2671HG]

Brexit uncertainty was also in focus, with British Prime Minister Boris Johnson due to explore his chances of securing a Brexit deal over lunch with European Commission chief Jean-Claude Juncker.

A British government source told Reuters that the potential deal cannot include a backstop for Northern Ireland and that if offered, Johnson will reject an extension of the Brexit deadline beyond Oct. 31.

"Oil is the predominant market driver globally with an added contribution from the ebb and flow from Brexit tensions," said Richard McGuire, head of rates strategy at Rabobank.

Most longer-dated euro zone government bond yields were down 4 to 5 basis points DE30YT=RR, NL30YT=RR, BE30YT=RR.

Germany's 30-year bond yield was down 4 bps at 0.05%, edging back towards negative territory after rising during last week's sell-off. German 10-year bond yields DE10YT-RR were down 2 bps at -0.48% DE10YT=RR.

While higher oil prices usually boost inflation expectations and in turn bond yields, analysts said the impact of the jump in oil prices was being offset by geopolitical risks.

"If oil prices remain elevated, at the very least because of a political risk premium now that the vulnerability of Saudi oil production has been laid bare, any impact on inflation will be of the wrong sort," Rabobank's McGuire said.

"Any higher spot inflation on purely cost push is only going to squeeze consumers' pockets," he added.

Weak economic data from China, where industrial production grew at its weakest pace in 17-1/2 years in August, added to the bounce in bond markets.

"Spikes in oil prices when the global economy is already flirting with the idea of recession is not ideal and, if repeated and sustained, could ultimately be what tips us over the edge," OANDA senior market analyst Craig Erlam wrote in a client note.

European Central Bank policymakers Philip Lane and Sabine Lautenschlaeger will be speaking later on Monday.

(Reporting by Yoruk Bahceli; Editing by Jacqueline Wong & Kim Coghill)

((Yoruk.Bahceli@thomsonreuters.com; +44 20 7542 7571; Reuters Messaging: yoruk.bahceli@thomsonreuters.com))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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