How should bond markets respond to lower oil prices?

While the slump in oil prices will reduce inflation in the major economies, it should also boost economic growth – at least where inflation is not dangerously low to begin with. The net effect on government bond yields therefore depends on several factors that could be pulling in different directions. We suspect that the upward pressures on government bond yields will eventually dominate in the US, whereas the opposite will continue to apply in Europe and especially in the euro-zone.