European government bonds slump as investors switch into US Treasuries

European government bonds slump as investors switch into US Treasuries

	Published : Thu, 19 Apr 2007 16:35 By : Agencies Print this Story

LONDON (Thomson Financial) - European government bonds slumped into negative territory after investors began to switch into US Treasuries in the afternoon.

Dealers said large volumes of orders came in on the open of the US market to sell European bonds in favour of US Treasuries.

European bonds 'have pulled back quite aggressively this afternoon with some pretty chunky volume going through to pretty much ease hopes of a sustained rally,' said Jim Dodgin at Thomson's IFR Markets.

'From here an immediate return to the steep decline looks unlikely, but buying dips does not appear to be a good idea,' he said.

Views are that while the US economy is still shaky -- particularly as the sub-prime mortgage market still shows weakness and raises the fear of a spillover into the wider housing market -- the euro area is set for at least another interest rate hike.

'The ECB is worried about longer run inflation risks and needs to get rates higher,' said David Brown at Bear Stearns.

He noted, however, that any suggestion of aggressive rate hikes would push the euro higher, potentially damaging the economic recovery.

'Gradualism should prevail, and the rate peak should level out at 4.0 pct' from the current 3.75 pct, said Brown.

Earlier today, bonds were higher, driven by weakness in equity markets, sparked in Asia overnight, after the Chinese economy proved stronger than expected in the first quarter, suggesting interest rates would rise there as well.

For today, the only remaining indicator is the US Philadelphia Fed's survey of manufacturing activity, which this afternoon is seen jumping to 2.4 in April from 0.2 in late March.

In the UK, gilts also turned lower, tracking global flows, with the overall market tone described as 'defensive' by analysts.

Earlier this week both inflation and earnings figures spiked to new highs, boosting views that interest rates are due to rise in May and possibly again after that.

At Yield Change on

1610 BST pct previous close

June euribor future (Liffe) 95.74 dn 0.01

GERMANY

June bund future (Eurex) 113.85 dn 0.31

4.00 pct Apr 2016 govt bond 98.61 4.13 dn 0.27

FRANCE

3.25 pct April 2016 govt bond 92.85 4.22 dn 0.26

June gilt future 107.02 dn 0.16

4.00 pct Sep 2016 govt bond 92.16 5.06 dn 0.15

June short sterling future 94.10 unchanged

September short sterling future 94.11 dn 0.01

carlo.piovano@thomson.com

cp/cp/slm

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