Bonds

Tuesday April 22, 04:15 PM
European government bonds lower on inflation concerns

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LONDON (Thomson Financial) - European government bonds were lower, as ongoing concerns over inflation in the euro zone outweighed a weak set of U.S. existing home sales figures and small falls in equity markets.

In the wake of recent

hawkish comments from European Central Bank (ECB) officials and rising commodity prices, the chances of an interest rate cut in the region any time soon look increasingly slim.

This has weighed on bonds, a move which accelerated this afternoon after rumours circulated the market that the next move in euro zone interest rates could even be a hike.

'We've seen a fair bit of weakness across the curve today, started by comments from ECB members and reflecting concern about inflation in the real economy,' said Mark Miller at HBOS Treasury.

These concerns were highlighted by ECB governing council member Yves Mersch, who said in an interview with Tuesday's Financial Times Deutschland that the central bank may revise its inflation projections up and its growth outlook down.

'At the moment, it is more likely that in June we have to adjust upward our inflation projections,' he told the paper.

These concerns overshadowed further weak news on the US housing market this afternoon, with figures showing existing home sales fell by more than expected last month.

Sales declined 2.0 pct in March to an annual rate of 4.93 mln units, from the 5.03 mln unit pace in February. That pace is 19.3 pct below the sales pace of a year earlier.

Over in the UK, gilts were also lower, following hawkish comments from Bank of England rate setter Tim Besley.

Besley said the 50 billion pound liquidity scheme, announced yesterday, will help the Monetary Policy Committee keep its focus on the job of keeping inflationary pressures in the UK economy in check. Analysts said the comments indicate the external MPC (A050540.KQ - news) member will be unwilling to cut interest rates next month, focusing his concerns on inflation rather than a slowdown in growth.

'Mr Besley's comments do little to for hopes that the Bank of England will step up the pace of interest rates any time soon, despite the serious downside risks to the economy,' said Howard Archer, UK economist at Global Insight.

Further clues about the MPC's current assessment of the UK economy will come tomorrow with the release of the BoE's minutes to its decision earlier this month to cut interest rates.

At Yield Change on

1452 GMT pct previous close

June euribor future (Liffe) 95.11 dn 0.10

Sept euribor future (Liffe) 95.24 dn 0.16

GERMANY

June bund future (Eurex) 113.86 dn 0.21

4.00 pct Jan 2018 govt bond 98.83 4.14 dn 0.28

FRANCE

4.25 pct Oct 2017 govt bond 97.11 4.36 dn 0.24

ITALY

4.50 pct Feb 2018 govt bond 99.41 4.62 dn 0.36

June gilt future 108.35 dn 0.20