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Government bonds rise in US and Europe

February 05, 2007 | Financial Times

Government bonds rose across the US and Europe on Friday as a weaker than expected report on US employment capped a week in which the Federal Reserve upgraded its assessment of the outlook for the US economy, while seeming to downplay inflation fears.

US Treasuries initially surged on Friday after the government reported an unexpectedly small increase of 111,000 non-farm payroll jobs in January, but the gains were muted as traders took note of upward revisions to the previous two months’ data. Analysts noted that a run of weak reports would be needed to move the Fed.

The Fed left interest rates unchanged at 5.25 per cent as expected on Wednesday, but made changes to its policy statement. It said economic growth was “somewhat firmer”, helped by “stabilisation” in the housing market, while readings on core inflation had “improved modestly”. The committee still cautioned that inflation risks remained, however.

By late afternoon in New York, the yield on the benchmark 10-year bond was 0.8 basis point lower on the day at 4.83 per cent, down from 4.88 per cent on Monday. The two-year note yield fell 2.5bp to 4.94 per cent, after starting the week at 4.98 per cent.

In late trading in the eurozone government debt market, the 10-year Bund was yielding 4.057 per cent, down 3.7bp, compared with 4.118 per cent at the beginning of the week.

UK gilts had a more volatile day of trading, and ended the day slightly lower, with the yield on the 10-year gilt up 0.5bp to 5.005 per cent. They were largely unchanged over the week. The 10-year was yielding 5.009 per cent on Monday.

After the US Fed decision, the attention now focuses on the European Central Bank and the Bank of England, which will have their rate-setting meetings next Thursday. While neither bank is expected to lift rates, the BoE has surprised the markets in the past with unexpected increases.

Japanese government bonds fell on continued strength in the equity market, with the Nikkei 225 Average touching a 10-month high. JGBs were already under downward pressure as the day’s trading started, after an overnight fall in US Treasury prices. The five-year bond was most affected, with the yield adding 3bp to 1.26 per cent.


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