Bonds

Friday April 18, 10:28 AM
European government bonds remain weaker after German PPI; UK gilts underperform

| | |

LONDON (Thomson Financial) - European government bonds remained under pressure on Friday morning after news of rising price pressures in Germany's manufacturing sector added to concerns over inflationary pressures in the euro zone.

Producer prices in Germany rose 0.7 percent in March from February, and were up 4.2 percent from a year earlier. This surpassed expectations for a monthly increase of 0.5 percent, and an annual rise of 4.0 percent.

'German PPI hit the tapes early this morning and has given bears even more cause to celebrate,' said Michael Cartine, an analyst at Thomson IFR Markets.

The rise in producer prices in the euro zone's largest economy comes on the back of the unexpected revision upwards on Wednesday to euro zone HICP inflation to a record 3.6 percent annually.

European Central Bank governing council member Axel Weber also highlighted inflationary concerns on Thursday when he said the persistence of high energy and food price inflation in the region is a cause for 'serious concern'.

Over in the UK, gilts were underperforming their European counterparts after comments from the Bank of England's chief economist Charles Bean on Thursday tempered expectations for another interest rate cut as soon as next month to offset the effects of the credit crunch.

Bean said the pound's decline since August should 'go some way to offsetting the contractionary impact of the dislocation in credit markets, as well as generating a more sustainable composition of demand and a much-needed reduction in the UK's current account deficit'.

Alan James, fixed income strategist at Barclays Capital said Bean's speech 'highlighted the importance of currency weakness in tempering the speed of Bank of England rate cuts'.

James said this 'implies less likelihood of a cut in May'.

However, he added that if the currency stabilises or rebounds, then the pace of cutting may accelerate again.

Friday morning's release of the the UK's public finances made little impact on the bonds market.

Although public sector net borrowing jumped to 10.2 billion pounds in March, above forecasts for a deficit of 8.0 billion, this brings the total PSNB for 2007 to 2008 to 35.6 billion pounds, which is within Chancellor of the Exchequer Alistair Darling Budget forecast of 36.4 billion pounds.

As a result, the UK Debt Management Office has said it will not be changing the amount of gilt sales for next year.

At Yield Change on

0904 GMT pct previous close

June euribor future (Liffe) 95.22 dn 0.03

Sept euribor future (Liffe) 95.43 dn 0.03

GERMANY

June bund future (Eurex) 114.33 dn 0.15

4.00 pct Jan 2018 govt bond 99.20 4.10 dn 0.13

FRANCE

4.25 pct Oct 2017 govt bond 97.32 4.34 dn 0.36

ITALY

4.50 pct Feb 2018 govt bond 99.68 4.59 dn 0.02