Gilts hold gains; European govt bonds remain weak on firm GDP figures

Gilts hold gains; European govt bonds remain weak on firm GDP figures

	Published : Tue, 13 Feb 2007 18:29 By : Agencies Print this Story

LONDON (AFX) - UK gilts have retained earlier gains since this morning's weak CPI data caused a sharp rise in the assets as the market scaled back interest rate expectations, while European government bonds remained lower as rate hikes appeared more likely.

Gilts rose sharply after data this morning showed the CPI rate had slowed to 2.7 pct in January after rising to 3 pct in December. The Bank of England is now widely expected to raise rates just one more time to 5.5 pct.

'After today's CPI figures the market is now expecting a much more dovish Inflation Report from the BoE tomorrow than previously anticipated,' said Jason Simpson at ABN Amro.

The Inflation Report tomorrow will be the key event for the UK markets, when the BoE will present its latest forecasts for growth and inflation, which should give further clues on the rate outlook.

'Inflation now looks like it has peaked and the market has adjusted its stance to price in just one hike in the first half of 2007, rather than two,' Simpson added.

In the euro zone meanwhile, euro zone bonds were weaker after stronger-than-expected data this morning increased the chances that the European Central Bank will raise interest rates further, at least once and probably twice.

GDP data out of the euro zone showed the economy grew by 0.9 pct in the fourth quarter, above expectations for a more modest rise of 0.5 pct. Figures out of Germany showed the ZEW index -- a survey of German economic expectations -- moved into positive territory at 2.9 from -3.6.

This led the market to rethink its rate expectations for the region, and began pricing in rates up to 4.0 pct and above from 3.50 pct currently.

Jason Simpson at ABN Amro said: 'Our view is that 4 pct will be the peak of the current rate cycle, but there are still risks it may go higher and the market is coming round to that view as well.'

Until recently the markets had expected just one more rate hike from the European Central Bank to 3.75 pct. However, last week's press conference by ECB president Jean-Claude Trichet was interpreted as giving strong signals about further rises.

'Today's data will build the pressure on the ECB and confirm some of Trichet's statements that indicated we were not yet close to the end of the rate hiking process,' said Simpson.

'It is quite right that the market has been unsettled by this, suggesting that previous rate increases have had little impact on the region's economy yet,' he added.

Elsewhere, weaker-than-expected US trade data this afternoon had little impact on bonds as the market awaited Federal Reserve chairman Ben Bernanke's appearance before Congress, which begins tomorrow.

At Yield Change on

1700 GMT pct previous close

March euribor future (Liffe) 96.085 unchanged

GERMANY

March bund future (Eurex) 114.74 dn 0.15

3.75 pct April 2017 govt bond n/a n/a n/a

FRANCE

3.25 pct April 2017 govt bond n/a n/a n/a

March gilt future 106.46 up 0.22

4.00 pct Sep 2016 govt bond 92.83 4.94 up 0.25

March short sterling future 94.37 up 0.05

June short sterling future 94.27 up 0.08

matthew.martin@thomson.com

mm//jkm/slm

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