WORLD BONDS-Oil price spurt could rile market
07:15 a.m. Mar 11, 1999 Eastern
By Paul Bolding
LONDON, March 11 (Reuters) - The sudden rise in the price of oil on the
prospect of production cuts could quite quickly feed into inflation expectations and
push bond yields higher, analysts said on Thursday.
The four-month high in benchmark Brent crude futures on Wednesday comes as
bond markets were adjusting to an ultra-low inflation environment.
''It is a lurking, meaningful danger for the U.S. Treasury market especially,'' said
Iain Lindsay, head of capital markets strategy at the Bank of Montreal in London.
A delegate to oil talks in Saudi Arabia on Wednesday said major Gulf Arab oil
producers wanted a cut of 2.3 million barrels per day.
This pushed futures to a four-month high on the New York Mercantile Exchange,
April crude settling at $14.69 a barrel, up 84 cents from Tuesday.
Some members of the Organisation of Petroleum Exporting Countries (OPEC)
were meeting in Amsterdam on Thursday to discuss the curbs and the next focus
will be an OPEC meeting on March 23.
Low oil prices have contributed to a new era of ultra-low inflation in major
developed economies and the turnround comes just as nervous talk of an imminent
rate hike in the United States was fading.
If sustained, the oil price rises could feed through into ''pipeline'' inflation -- rises
on the way through the economy -- quite quickly, economists said.
''Given that growth is strong in the dollar bloc, if pipeline inflation pressures return,
then it does becomes an issue for interest rates expectations,'' said Brian Venables,
senior bond analyst at ABN-AMRO in London.
A rise in oil could feed into inflation data just as the effect of cheaper oil was falling
out of the U.S. consumer price index. U.S. consumer price inflation was 1.7
percent in the year to January and just 0.1 percent in the month.
The prospect of more expensive oil as well as an end to imported deflation from
the high dollar, notably against the yen, would be especially damaging.
''That aspect is also not going to be particularly constructive for the bond
markets,'' said Lindsay.
He saw the yield on the benchmark U.S. 30-year bond rising to 6.0 percent from
5.58 percent now.
He said Europe would not suffer directly to the same extent as the U.S. because
the transmission methods were not so efficient. ''But the long end of Europe will
be dragged down with any U.S. movement,'' he said.
''Europe, in a pronounced downmove, will probably outperform the U.S. but it
will be very much directionally driven,'' he added.
But Venables at ABN AMRO said Europe would suffer from a new oil price rise
because of the weak euro.
''The problem in Europe is that oil is priced in dollars: if we continue to see a euro
depreciation, the euro price of oil will rise faster than the comparable dollar figure
-- therefore you compound the risk in Europe,'' he said.
John Butler, fixed income strategist at WestLB, warned that possible oil
production curbs along with stable demand made it possible oil prices would
remain above their lows for some time.
''Bond markets need to consider the possibility that the 'Goldilocks' conditions
(strong growth amidst low inflation) made possible by falling commodity prices can
be reversed,'' he said in a note.
((International bonds desk +44 171 542 6701, fax +44 171 542
5285, uk.governmentbonds.news+reuters.com))
Copyright 1999 Reuters Limited. |
