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European government bonds slide further on strong equity gains

Monday, February 18, 2008

LONDON (Thomson Financial) - European government bonds continued to slide as stock markets rose strongly in the absence of any US trading, closed for President's Day.

The rise in prices is partly magnified by a lack of trading volume as US markets remain closed, but the improved sentiment has caused some profit-taking on the gains made last week.

Analysts say this may continue into tomorrow, when economic data will once again be scarce, leaving the stock market to drive bond prices.

"Whether the good mood will prevail of course remains to be seen; but a lack of A-list US economic data releases this week could mean that fears of a US recession -- whose odds have undoubtedly shortened following Friday's poor batch of US economic figures -- may linger on in investors' minds," said Neil Mellor at Bank of New York Mellon.

The markets are pricing in about 100 basis points-worth of cuts by the Federal Reserve by year-end, a view that has been cemented by the weak US economic data last week.

Looking at the days to come, the US will remain a key focal point, with inflation, housing starts and the Fed minutes due on Wednesday.

John Davies at WestLB believes the overall trend in US economic data "will continue to signal a recession."

"Growth in consumer prices probably accelerated again in January due to the higher energy prices... (but) the Fed will continue to weight growth risks more heavily than inflation risks," said Davies.

In both the US and Europe, bond prices will continue to show a steepening in their yield curve -- as shorter-dated maturities perform better than longer-dated ones on views that interest rates will be cut in the short-term.

In the UK, gilts were also lower, tracking the wider economy in the wake of the news that Northern Rock PLC, the troubled bank, will be nationalised.

Stephen Lewis at Insinger de Beaufort believes there will be little impact on debt markets.

"A more significant issue than Northern Rock for gilts-holders is the ongoing debate about the future liabilities of defined benefit pension schemes," he said.

The UK Pensions Regulator will publish proposals this week to reform the pensions benefit plans to account for greater longevity of beneficiaries, effectively increasing liabilities for pension funds by six to eight percent.

"More funds are, therefore, likely to be channeled into gilts than would otherwise have been the case," said Lewis.

At Yield Change on

1555 GMT pct previous close

March euribor future (Liffe) 95.66 dn 0.01

June euribor future (Liffe) 96.04 dn 0.05

GERMANY

March bund future (Eurex) 116.02 dn 0.41

4.00 pct Jan 2018 govt bond 99.94 4.00 dn 0.39

FRANCE

4.25 pct Oct 2017 govt bond 100.95 4.13 dn 0.39

ITALY

5.25 pct Feb 2018 govt bond 101.31 4.38 dn 0.28

UK

March gilt future 109.25 dn 0.25

5.00 pct March 2018 govt bond 102.88 4.64 dn 0.29

March short sterling future 94.37 dn 0.01

June short sterling future 94.77 dn 0.04

Posted by MOHAMED SAID at 10:06 AM  

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