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Treasuries hit by trade deficit data

January 11, 2007 | Financial Times

A slight improvement in the US trade deficit, combined with falling oil prices and a stronger-than-expected report on mortgage applications pushed US Treasuries lower on Wednesday as signs of a resilient economy further dimmed hopes of interest rate cuts this year.

The Mortgage Bankers’ Association reported a 16.6 per cent increase in its market index. Meanwhile, other figures on the US trade balance showed the deficit narrowing unexpectedly from $58.8bn in October to $58.2bn in November. Although the contraction was modest, economists had expected a widening to $60bn.

A report on US wholesale trade on Wednesday also revealed surprisingly strong inventory growth through November, further boosting prospects for strong gross domestic product growth in the fourth quarter.

By late afternoon in New York, the yield on the benchmark 10-year bond had risen 2.6 basis points to 4.688 per cent. The two-year note yield added 2.1bp to 4.821 per cent.

The sell-off in the US dented sentiment in Europe, where investors were nervous ahead of Thursday’s interest rate decisions by the European Central Bank and the Bank of England.

The yield on 10-year eurozone government bonds touched a six-month high of 4.028 per cent. In late trading, the 10-year Bund yield was up 1.3bp at 4.027 per cent. The two-year yield rose 1.7bp to 3.963 per cent.

While the ECB is expected to keep rates on hold at 3.5 per cent, many market participants, expecting an increase later in the year, will be looking for clues as to whether the move could come in February or March.

The Bank of England is widely expected to keep rates at 5 per cent, though recent strong economic data suggest a rate rise may not be far off. Gilts fell and the 10-year gilt yield rose to the highest level since March 2005 and the two-year yield to the highest in five years. In late trading, the yield on the 10-year gilt was 1.4bp higher at 4.817 per cent. The two-year gilt yield was 0.2bp higher at 5.241 per cent.

The yield on the 10-year Japanese government bond rose to a two-month high, prompted by hawkish comments from Bank of Japan chief economist Hideo Hayakawa and a weak auction result for Y1,900bn of 10-year notes.


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