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Eurozone bond gains limited ahead of ZEW survey

January 16, 2007 | Financial Times

Eurozone government bonds made gains on Monday, clawing back losses from the sharp sell-off last week.

However, price rises were limited ahead of the release on Tuesday of the ZEW business survey from Germany, a key indicator of economic sentiment. Trading across Europe was lighter than usual, with the US markets on Monday closed for a public holiday.

The gains came amid data showing weaker-than- expected industrial production for the eurozone in November. There was a monthly increase in November of just 0.2 per cent, after falling 0.1 per cent in October. This takes the annual rate of growth down to 2.5 per cent, from 3.6 per cent.

Martin van Vliet of ING Financial Markets said that with the uptrend in production showed signs of levelling off, the window of opportunity for the European Central Bank to keep raising interest rates “appears to be closing somewhat.” However, he said a further rate rise in March was a strong possibility. Last week, the ECB kept its main interest rate on hold at 3.5 per cent.

As prices rose in late trading, the yield on the two-year Schatz fell 3.3 basis points to 3.897 per cent and the yield on the 10-year Bund edged down 0.9bp to 4.054 per cent.

Gilt prices were mixed, as some investors put aside Monday’s higher-than-expected UK producer prices data and looked towards Tuesday’s consumer price inflation figures for clues about the Bank of England’s surprise decision last week to raise interest rates to 5.25 per cent.

The market is now pricing in a further 25bp increase for May 2007, according to Barclays Capital. The yield on the two-year gilt added 0.2bp to 5.402 per cent. However, the yield on the 10-year gilt fell 0.7bp to 4.902 per cent.

The steady of descent of Japanese government bond prices petered on Monday and yields were largely unchanged, with investors reluctant to push up yields still further ahead of the Bank of Japan’s interest rate decision on Thursday.

With expectations of a rate rise already at fever pitch, even strong machinery orders figures failed to move JGB prices any lower. The most notable movement was seen on short-dated bonds. The two-year ended 1bp higher at 0.860 per cent.


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