European govt bonds lower as ECB's Trichet hints at further rate hikes to come |
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Thu, 08 Mar 2007 17:57
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LONDON (AFX) - European government bonds dropped after European Central Bank president Jean-Claude Trichet suggested that today's interest rate rise will not be the last.The ECB today increased its main refinancing rate by a quarter point to 3.75 pct in a move that had been well flagged in advance by the market. Trichet's comments in his accompanying press conference, however, disappointed some in the market who had hoped borrowing costs may not move any higher.'The bond market was going into the press conference with a slight hope that Trichet would give a more dovish signal. But he basically confirmed that there is still room for another rate hike,' said Audrey Childe-Freeman at CIBC.She added that some in the market had been thinking 3.75 pct would mark the peak in euro zone interest rates.Trichet told the press conference this afternoon: 'As regards whether or not we are at a peak, I didn't say we were at a peak, full stop', adding that future rate decisions will depend on the ECB's assessment of risks to price stability.The wording was altered slightly from previous meetings, however, with Trichet now describing ECB rates as 'moderate' rather than 'low' and monetary policy as 'on the accommodative side' rather than simply 'accommodative'.'Over the next few months, the evolution of euro zone inflation data could prove crucial and expectations could rally dramatically should inflation edge down to 1.5 pct in the next few months,' said David Brown at Bear Stearns.'In the meantime, the euribor futures strip will be slightly disappointed that it has not been given more encouragement about an end in sight to higher rates,' he added.Over in the UK meanwhile, longer-dated gilts were also lower, though short sterling futures, seen as a gauge of interest rate expectations, were higher on relief that the Bank of England did not raise interest rates today.The BoE announced it left its key repo rate on hold at 5.25 pct for the second month running. Though the decision was broadly as expected, there were jitters in the market that rate-setters could opt for a quarter-point rate increase.'The BoE had not been expected to hike rates but because of the recent tendency to surprise, the market had been a little nervous ahead of the announcement,' CIBC's Childe-Freeman said.The BoE has raised interest rates three times recently, with the rate hikes in August last year and January this year both taking markets by surprise.Analysts noted, however, that the relief in the gilt market is likely to be short-lived, with UK interest rates fully expected to rise at some point over the coming months.'There was a little relief but nothing dramatic as everyone knows rates will be going higher anyway,' Childe-Freeman said.At Yield Change on1629 GMT pct previous closeJune euribor future (Liffe) 95.96 dn 0.04GERMANYMarch bund future (Eurex) 116.06 dn 0.113.75 pct April 2017 govt bond 98.55 3.93 dn 0.02FRANCE3.25 pct April 2017 govt bond 98.14 3.98 dn 0.08UKMarch gilt future 109.45 dn 0.084.00 pct Sep 2016 govt bond 94.14 4.77 dn 0.01June short sterling future 94.35 up 0.01September short sterling future 94.36 up 0.01jessica.mortimer@thomson.comjkm/slmCOPYRIGHTCopyright AFX News Limited 2007. All rights reserved.The copying, republication or redistribution of AFX News Content, including by framing or similar means, is expressly prohibited without the prior written consent of AFX News.AFX News and AFX Financial News Logo are registered trademarks of AFX News Limited
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Gilts sharply lower after surprise BoE rate hike; European bonds underperform 