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European bonds fall on economic data

January 10, 2007 | Financial Times

European government bonds fell on Tuesday after news of a strong rise in German industrial output and a wave of supply from local borrowers.

The 10-year bund, a benchmark for European government bonds, saw its yield rise above 4 per cent for the first time since a shortlived blip in early August. The last time it was above that level for a prolonged period was in the first half of last year.

With the European Central Bank meeting on Thursday, the market will be watching for further signs that interest rates are likely to rise in the first quarter.

The 10-year bund yield was up 3.4 basis points at 4.007 per cent while the two-year Schatz yield was 3.3bp higher at 3.940 per cent.

Some analysts said eurozone bonds also suffered because some investors were switching into UK gilts, and that strong demand for the £2.25bn auction of 20-year gilts on Tuesday illustrated that. Orders for the bonds were 2.3 times the amount of paper on offer.

The successful auction helped gilts outperform in spite of data showing strong retail sales over the Christmas period, although yields were still a touch higher on the day.

The two-year gilt yield was up 1.7bp at 5.239 per cent, its highest level in 5½ years, while that on the 10-year was up 1bp at 4.803 per cent.

US Treasuries were range-bound as the market struggled to generate momentum in either direction on a lack of top-tier economic data releases.

Investors were looking ahead to Wednesday’s report on the November trade balance and Friday’s retail sales numbers for December. Economists are expecting a slight widening in the US trade deficit, to $60bn from $58.9bn the previous month.

By late afternoon in New York, 10-year bonds were a tough higher, with the yield 0.4bp lower at 4.656 per cent. The two-year note fell slightly, with the yield up 0.8bp at 4.790 per cent.

Japanese government bond prices fell after a triple whammy: overnight falls in US Treasuries, a rise in Tokyo shares, and expectations the Bank of Japan will raise rates next week. The yield on the 10-year note rose 2bp to 1.740 per cent.


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