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Treasuries higher on regional data

January 17, 2007 | Financial Times

US Treasuries were higher on Tuesday after overnight buying by Asian investors and a weaker-than-expected manufacturing report from the New York region halted last week’s dramatic sell-off.

The New York Federal Reserve’s Empire State index plunged to 9.13 from a revised 22.19 in December. December’s reading was originally reported at 23.13. Economists had expected a January reading of 20.

Michael Englund, analyst at Action Economics, said that while the data were expected to weaken, the depth of the decline was not expected and cut against the grain of the series of stronger economic reports last week.

By late afternoon in New York, the yield on the benchmark 10-year bond was 2.6 basis points lower at 4.751 per cent. The two-year note yield was 2.5bp lower at 4.868 per cent.

The lift in the US gave support to markets across the Atlantic. However, the overall mood in Europe was still relatively bearish.

Data showed that annual UK inflation rose to 3 per cent in December. However, after last week’s surprise interest rate increase to 5.25 per cent by the Bank of England, markets had been preparing for an even higher reading.

Partly on relief trading, the yield on the 10-year gilt was down 1.2bp to 4.892 per cent while the two-year gilt was yielding 5.398 per cent, down 0.3bp.

Eurozone government bond prices were mixed following a sharp improvement in Germany’s ZEW business expectations index, an indicator that only supported the market’s widespread belief that the European Central Bank will continue to raise interest rates.

In late trading, the yield on the 10-year Bund was down 1.9bp to 4.039 per cent but the yield on the two-year Schatz edged up 0.6bp to 3.947 per cent. A sale of ?5bn worth of 10-year bonds by Belgium was met with strong demand, as investors were lured by the recent rise in European bond yields to near six-month highs.

The Japanese government bond market remained virtually paralysed, ahead of Thursday’s interest rate decision by the Bank of Japan. The market expects the bank to raise rates but traders are wary of making big calls before the result. This left the 10-year yield unchanged at 1.745 per cent.

However, the yield on the five-year fell 1bp to 1.320 per cent, following strong demand in Tuesday’s Y2,000bn auction.


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