Bonds

Wednesday April 16, 04:17 PM
European government bonds stay lower on inflation scare

| | |

LONDON (Thomson Financial) - European government bonds remained lower, suffering from a surprise upward revision in euro zone inflation figures which suggests that the European Central Bank will not cut interest rates anytime soon.

Euro zone HICP inflation edged up to 3.6 percent in March, up from the provisional estimate of 3.5 percent, and marking a new record high.

The figure 'justifies the ECB's escalating hawkishness and dampens chances for a rate cut before the fourth quarter,' said Ashraf Laidi at CMC Markets.

Analysts generally expect weaker economic growth in the US and Europe to drag inflation down in the second half of the year, but ECB rate-setters will remain cautious on price pressures until then.

'Before it will cut rates, the ECB needs to see signs that inflation is easing -- or that the euro zone economy is in such deep trouble that a rescue is needed,' said Katrin Robeck at Moody's Economy.com.

The fall in government bond prices was strong enough to shrug off more bad housing data from the US.

US building permits fell 5.8 percent to 927,000 in March, well below expectations for a 965,000 number, while housing starts fell 11.9 percent to the lowest levels since 1991.

'Further job losses and reductions in demand for construction materials look inevitable for the next six months and probably into 2009,' said John Kemp at Sempra Metals.

Meanwhile, US CPI data rose as expected, up 0.3 percent in March for a 4.0 percent annual rate. Core CPI was up 2.4 percent on the year.

'While the Federal Reserve can continue to ignore elevated headline inflation in the short-term, persistently high food and energy prices will eventually impact core inflation in the longer-term and with it inflation expectations,' said Michael Woolfolk at Bank of New York Mellon.

Therefore, the more the Fed cuts interest rates in coming months, the more it will likely have to give back later -- perhaps as early as year-end, he said.

In the UK, gilts were lower than the wider market, on profit-taking from yesterday's rally and weighed by news that the Bank of England is close to finalising the terms for an intervention in the mortgage markets.

In such an event, the BoE would either swap mortgage-backed securities for government bonds or accept a wider range of collateral for its loans in order to kick-start credit markets back into life.

Data this morning also showed the labour market is still in good health, although the decreases in unemployment are now levelling off, while average earnings remain stable.

At Yield Change on

1555 GMT pct previous close

June euribor future (Liffe) 95.25 dn 0.05

Sept euribor future (Liffe) 95.52 dn 0.06

GERMANY

June bund future (Eurex) 115.24 dn 0.29

4.00 pct Jan 2018 govt bond 99.97 4.00 dn 0.28

FRANCE

4.25 pct Oct 2017 govt bond 98.12 4.23 dn 0.26

ITALY

4.50 pct Feb 2018 govt bond 100.22 4.52 dn 0.28

June gilt future 110.06 dn 0.47