Bonds

Wednesday April 23, 12:53 PM
European government bonds recover from week's earlier losses

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LONDON (Thomson Financial) - European government bonds were up slightly, recovering from sharp losses earlier this week, and after the euro zone PMI showed the stronger euro is having hurting the real economy.

The 'flash'

estimate for services PMI rose to 51.8 in April from 51.6 in March, better than market expectations for a modest fall to 51.5, but the manufacturing indicator fell to 50.8 from 52.0, the lowest since August 2005 and weaker than the 51.6 consensus.

The pricing components were higher, confirming the European Central Bank will not cut rates any time soon, but also showed employment and exports are suffering from the effects of a strong currency.

'The strong euro is now more clearly a source of difficulties, but the overall softening in economic activity in the euro zone is still very gradual,' said Gilles Moec at Bank of America.

'On balance, today's data are consistent with the ECB staying on hold for a long period of time,' he said.

In the UK, gilts were mostly higher, but underperforming the wider market after the minutes to the last Bank of England policy decision showed a reluctance to cut interest rates.

A three-way vote -- with two votes for a larger half point cut, two members seeking unchanged rates and the rest voting for a quarter point cut -- revealed how some rate-setters see high inflation as a short-term phenomenon while others fear it may become ingrained in the economy through consumer expectations.

'It seems unlikely that these differences will be resolved in the near future,' said Jonathan Loynes at Capital Economics.

As inflation is likely to accelerate in coming months, 'it seems likely that interest rates will continue to fall at a fairly gradual pace,' he said.

He expects the next cut will come in June, although the slow pace of these cuts will mean further policy easing next year.

Meanwhile, shorter-dated bond prices in the UK remained under some pressure after interbank lending rates edged higher despite the BoE's announced liquidity scheme -- where banks would be able to swap mortgage assets for gilts for up to three years.

Because the cost of the scheme for banks depends upon developments in the money markets, the fact that these rates are staying high is expected to limit the plan's appeal for the time being.

At Yield Change on

1135 GMT pct previous close

June euribor future (Liffe) 95.14 up 0.03

Sept euribor future (Liffe) 95.30 up 0.05

GERMANY

June bund future (Eurex) 114.00 up 0.24

4.00 pct Jan 2018 govt bond 98.95 4.13 up 0.14

FRANCE

4.25 pct Oct 2017 govt bond 97.27 4.34 up 0.17

ITALY

4.50 pct Feb 2018 govt bond 99.51 4.62 up 0.06

June gilt future 108.50 up 0.18