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Treasuries fall after upbeat Michigan survey

January 22, 2007 | Financial Times

US Treasuries fell on Friday after unexpectedly strong data on January consumer sentiment added to a string of encouraging economic reports this week.

The economic data bolstered the view that the US Federal Reserve is unlikely to cut interest rates in the first half of the year.

The University of Michigan’s consumer sentiment index rose to 98.0, from 91.7 in January, above estimates for a 92.5 reading.

“Falling gasoline prices, soaring stock prices, low interest rates, a tightening labour market and surging income with record bonus payments are continuing to boost these survey readings,” said Michael Englund at Action Economics.

Earlier in the week, bearish sentiment in bonds was stoked by a series of strong economic indicators, including new home starts, regional manufacturing activity and lower jobless claims.

However, the subsequent creep higher in yields meant that some investors began to see value in the market, resulting in some buying on Thursday – mitigating the week’s losses.

By late afternoon in New York, the yield on the benchmark 10-year bond was 3.5 basis points higher at 4.783 per cent, up from 4.74 per cent on the week. The two-year note added 3.9bps to 4.928 per cent, after starting the week at 4.88 per cent.

Eurozone government bonds were lower in late trading on Friday after a week of volatile trading amid concerns about future interest rate rises.

The yield on the 10-year Bund started the week at 4.054 per cent, jumped sharply during the week, and in late trading on Friday was at 4.051 per cent.

Interest in the very long-dated bonds market was underlined when Italy joined Greece in saying that it was considering launching a 50-year bond.

Meanwhile, UK gilts, fell amid an overall bearish mood set off by the Bank of England’s recent decision to raise interest rates to 5.25 per cent.

Strong data from the retail sector reinforced concerns that rates may rise again. Investors will be looking next week to the minutes of the last Bank of England meeting for clues.

The yield on the 10-year gilt was up 1.4bp to 4.909 per cent after having started the week at 4.897 per cent.

Japanese government bonds performed another about-turn on Friday, as confusion reigned about effects of the Bank of Japan’s decision to leave interest rates unchanged this month.

Prices rose and yields fell for most bonds. The yield on the two-year bond dropped 4.5bp to 0.780 per cent.


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