Europe : Euro zone bond yields rise on oil surge, U.S. rate hike prospects

LONDON : Aug 12 Euro zone bond yields edged back from record lows on Friday after the price of oil surged more than 5 percent and a top U.S. central banker said the world’s largest economy should raise interest rates this year.

Over the last two trading sessions, oil prices have bounced sharply back to three-week highs on expectations that exporters could discuss at an upcoming meeting ways to prop up a market that continues to be dogged by a supply overhang.

Bonds are sensitive to sharp moves in crude prices because of the implications they can have for future inflation.

The likelihood that inflation is heading higher was one of the reasons San Francisco Fed President John Williams gave in an interview on Thursday in which he called for tighter monetary policy in the United States.

The Fed raised rates last December for the first time in nearly a decade, but did not continue to lift them as it had anticipated in order to cushion the economy from the slowdown in China and financial market turmoil.

Investors see around a 45 percent chance for a further hike this December, according to CME’s FedWatch Tool, a move which would push up bond yields globally.

German 10-year bond yields, the euro zone benchmark, rose 2 basis points to minus 0.14 percent on Friday, pulling away from a record low of minus 0.20 percent hit early last month in the wake of Britain’s shock vote to leave the European Union.

“Since we had that drop to a record low in July, German bond yields have been pretty stable and oil prices will have a role in where we go from here,” RBC’s chief European macro strategist Peter Schaffrik said.

Most other euro zone yields were slightly higher on the day ahead of growth data due at 0900GMT, with Spanish equivalents off record lows of 0.92 percent hit Thursday on signs that negotiations on a coalition government were progressing.

Brent crude futures rose nearly 1 percent on Friday to hit $ 46.66, the highest since mid-July, adding to a gain of over 4 percent seen on Thursday after Saudi Arabia’s energy minister Khalid al-Falih said that oil producers would discuss potential action to stabilize oil prices during a meeting next month in Algeria.

The prospect for an inflation-boosting rise in oil and signals that the Federal Reserve is gearing up to raise interest rates again overshadowed some weak economic data from China that dampen the prospects for global growth.

Instead investor focus turned to a raft of data from the U.S. scheduled later in the day, of which July’s retail sales numbers at 1230GMT are the highlight.

Economists polled by Reuters expect an increase of 0.4 percent last month, up from 0.6 percent previously.