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European govt bonds sharply lower as equities continue rally
Thursday, January 24, 2008
LONDON (Thomson Financial) - European government bonds remained sharply lower, pressured by a reversal in safe haven flows as equity markets continued to rally higher.
European stock markets have staged a massive comeback today from the substantial losses suffered earlier this week, following a dramatic turnaround in the US last night, although Wall Street has struggled to sustain gains today.
"Fundamentals have been put on the sidelines this week ... attention is very much focusing on the equity markets after the sell-off in safe haven gains that we'd seen in bonds from Monday," said Audrey Childe-Freeman, senior European economist at CIBC World Markets.
She added that European bonds are also suffering from the diverging interest rate expectations in the US, where the Fed has been aggressively pushing them down, and the euro zone where the central bank is still reluctant to consider reductions at all.
"Yield levels were not realistic or consistent with the outlook for interest rates in Europe," she said.
Over in the UK, gilts were tracking the negative trend on the rest of the bonds market, but also pressured by expectations that though interest rates are likely to fall next month, they will not tumble as quickly or as far as in the US.
Both Bank of England governor Mervyn King on Tuesday, and independent member of the Monetary Policy Committee Andrew Sentance today have said that they consider the current benchmark Bank rate of 5.50 pct to be restrictive, but both also highlighted inflation remains a crucial concern.
"The remarks from King and Sentance really wrap up the view that the BoE is worried about inflation; they do acknowledge downside risks to the economy, but they're not ready to cut generously, and that's why the market is readjusting," said CIBC World Market's Childe-Freeman.
At Yield Change on
1630 GMT pct previous close
March euribor future (Liffe) 95.71 dn 0.19
June euribor future (Liffe) 96.04 dn 0.23
GERMANY
March bund future (Eurex) 115.99 dn 1.08
4.00 pct Jan 2018 govt bond 99.93 4.00 dn 1.02
FRANCE
4.25 pct Oct 2017 govt bond 101.00 4.12 dn 0.91
ITALY
5.25 pct Feb 2018 govt bond 101.05 4.41 dn 1.12
UK
March gilt future 110.14 dn 0.87
5.00 pct March 2018 govt bond 103.76 4.53 dn 1.03
March short sterling future 94.59 dn 0.19
June short sterling future 94.92 dn 0.18
