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30-year Treasury yields briefly break above 5%

January 30, 2007 | Financial Times

Government bonds fell on Monday amid fears the interest rate outlook could be less friendly than expected.

The yield on 30-year US Treasuries briefly broke above 5 per cent as yields at all maturities approached that level ahead of Wednesday’s interest rate decision by the US Federal Reserve.

A gradual six-week sell-off has brought the bond market roughly in line with the relatively benign economic outlook espoused by Ben Bernanke, the Fed chairman.

Michael Cheah, portfolio manager at AIG Sun America Asset Management, said: “The sell-off has been based on momentum and, in order to sustain the negative tone in rates, you must believe the Fed will raise rates this year.”

The US central bank is expected to hold the Fed funds interest rate steady at 5.25 per cent on Wednesday, but the accompanying statement will be studied for surprises on growth or inflation.

Treasury yields hit new five-month highs. In late afternoon trade in New York, 30-year paper was yielding 4.995 per cent. Two and 10-year yields were each up 2 basis points, at 4.987 per cent and 4.896 per cent respectively.

European government bonds fell, weighed down by the latest hawkish comments by European Central Bank policymakers. The selling pressure spilled over into UK gilts, which were already pressed by a survey showing a jump in retail sales.

“There has been virtually no euro area data released, but in the current bearish environment that translates into no reason for bonds not to fall,” said Andy Chaytor, analyst at the Royal Bank of Scotland.

The 10-year gilt yield pushed above 5 per cent for the first time since September 2004 and was at 5.016 per cent in late trading, up 2.9bp. The two-year gilt yield was 5.505 per cent, up 1.2bp.

Meanwhile, 10-year Bund yields were up 3bp at 4.120 per cent, while the two-year yield was up 1.7bp at 3.978 per cent, after earlier pushing above 3.98 per cent, the highest since mid-2002.

Japanese government bonds also weakened. The yield on the 30-year leapt 5bp to 2.455 per cent, while the 10-year yield rose 3bp to 1.720 per cent.


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