FXStreet (Delhi) – Research Team at Deutsche Bank, suggests that oil prices are exerting a significant impact on global bond markets. Key Quotes “First, there is an obvious and very strong correlation between oil prices and the inflation risk premium and the term premium. Second, the ECB has now introduced a strong link between oil prices and monetary policy. The ECB is primarily concerned about a disanchoring of inflation expectations, i.e. the risk that persistently low spot inflation feeds into inflation expectations.” “In that respect, the ECB is less focused on why spot inflation is low (supply or demand factors, temporary or permanent) and inclined to react if spot inflation remains too low for too long. Given that spot inflation is itself largely determined by oil prices, there is an obvious link between the latter and the ECB’s policy decisions.” “Our oil strategists see potential downside risks to oil prices in the short term, but are more positive for the medium-term outlook from a supply/demand perspective. The turn in oil prices, when it occurs, is likely to signal both a normalization of the term premium in bond markets and underperformance of European fixed income. Conversely, continued decline in oil prices would delay any prospects of an ECB tapering and further slow the pace of rate hikes in the US.” For more information, read our latest forex news.