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Bond investors eye value

January 19, 2007 | Financial Times

US Treasuries rose pn Thursday as investors brushed off a day of strong economic reports and saw value in bonds after a six-week sell off that had pushed yields to three-month highs.

Early in the session, bonds fell after stronger-than-expected housing data and an unexpected drop in jobless claims reinforced investor sentiment that the Federal Reserve is increasingly unlikely to cut interest rates in the first half of the year.

December’s consumer price inflation figures had little impact on the market, although the CPI rose for the first time since August.

The market was also unmoved by Fed chairman Ben Bernanke’s testimony to a Senate committee, as he focused on budget issues and the US deficits. He did say, however, that consumer price data may overestimate inflation pressures.

By late afternoon in New York, the yield on the 10-year bond was down 2.8 basis points at 4.757 per cent. The two-year note yield was down 1.3bp at 4.898 per cent.

European government bonds sank amid continued concerns about further monetary tightening.

“Major central banks are keeping up appearances with tough talk that continues to keep the bond markets on their toes,” said David Brown, chief European economist at Bear Stearns.

The eurozone market still absorbed a large supply of paper. In late trading, the yield on the 10-year Bund rose 3.3bp to 4.074 per cent and the two-year Schatz yield was up 3.4bp to 3.965 per cent.

UK gilts lost ground after an upbeat report from the British Chamber of Commerce. The 10-year UK gilt yield edged up 0.9bp to 4.909 per cent and the two-year paper was yielding 5.468 per cent, up 2.8bp.

Traders in Japanese government bonds reacted to Thursday’s interest rate decision by the Bank of Japan with a textbook display of buying on the rumour and selling on the fact. Prices rose sharply on Wednesday as the markets decided the bank was unlikely to raise rates.

But on Thursday the yield on the 10-year bond climbed 2bp to 1.710 per cent, as analysts became more confident that the BoJ would increase the rate next month instead.


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