Bonds

Friday April 25, 11:28 AM
European government bonds weaken further after Japanese market rout

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LONDON (Thomson Financial) - European government bonds continued to fall, tracking losses in the United States and Japan.

U.S. Treasuries and Japanese government bonds both fell overnight, with the decline in the latter so sharp that

trading limits were briefly imposed.

In this context, there was little to support European fixed-income issues.

'Simply put, the pressure from massive losses in overseas markets is too great to withstand, especially coming into an already fragile market, which has seen June Bunds trade down eight of the last nine sessions,' said Michael Cartine at Thomson IFR Markets.

'The price action (in Europe) has simply been horrible,' he said. Some of this weakness could be due to inflationary pressures yet to show up in official data, which is already at elevated levels, he said. Euro zone inflation hit 3.6 percent in March, the highest since the euro was launched in 1999.

Euro zone and UK data this morning came in on the soft side, but gave scant relief to bonds.

Euro zone M3 money supply growth continued its broad decline in March, slipping to 10.3 percent from 11.3 percent in February. Though this could point to flagging inflationary pressures, analysts said the headline inflation rate remains so high that the European Central Bank is unlikely to soften its hawkish stance for some time yet.

Meanwhile, in the UK, gilts recovered some of their earlier losses but remained sharply lower on the day, after figures showed growth in the UK economy slowed to a three-year-low in the first quarter.

UK GDP growth was 0.4 percent in the first three months of the year, down from 0.6 percent in the fourth quarter and the lowest since the first quarter of 2005.

Howard Archer, chief UK economist at Global Insight, said the weak data will add to pressure on the Bank of England to cut interest rates sooner rather than later.

'We expect the Bank of England to trim interest rates by a further 25 basis points to 4.75 percent in June, but would not rule out a move as early as May if credit conditions remain tight,' he said.

At Yield Change on

1106 GMT pct previous close

June euribor future (Liffe) 95.11 dn 0.02

Sept euribor future (Liffe) 95.28 dn 0.01

GERMANY

June bund future (Eurex) 113.36 dn 0.19

4.00 pct Jan 2018 govt bond 98.29 4.21 dn 0.10

FRANCE

4.25 pct Oct 2017 govt bond 96.70 4.41 dn 0.14

ITALY

4.50 pct Feb 2018 govt bond 98.98 4.68 dn 0.06

June gilt future 107.36 dn 0.32