European govt bonds soar on fresh subprime credit market concerns

European govt bonds soar on fresh subprime credit market concerns

	Published : Fri, 20 Jul 2007 16:36 By : Agencies Print this Story

LONDON (Thomson Financial) - European government bonds soared as fresh concern about subprime mortgage backed credit instruments and rumours of stressed hedge funds prompted a rush of safe-haven buying.

Ratings Agency Standard & Poors announced earlier today that they were downgrading 32 synthetic European Collateralised Debt Obligations (CDOs). This has exacerbated ongoing concern about this type of specialist debt instrument and triggered a so-called 'flight to quality'.

'This downgrade has bought in another bout of risk aversion, which has driven the flurry of buying we have seen in the bond market this afternoon', said Orlando Green, fixed income analyst at Calyon.

Analysts also said that rumours in the market about a German bank and hedge fund undergoing major difficulties in the credit derivatives market has added to the frenzied rally.

John Davies, fixed income analyst at West LB said that this round of buying has pushed the key German September bund future out of the range it's been trading in for the past month or so.

'Once the bund broke past this level it triggered a whole bunch of stops in the market, which prompted it to rise even higher', he said.

Shares on Wall Street and major European equity markets are all down which has given bonds even more support.

'Equities are down and the euro reaching a fresh high against the dollar has also helped bonds,' said Davies.

The strong euro can drive up bond prices as it boosts expectations that the European Central Bank will refrain from raising interest rates while the exchange rate is so high.

Meanwhile in the UK gilts were also stronger, with this ongoing concern about credit markets outweighing a strong second quarter GDP reading.

Preliminary official data showed the UK economy grew by 0.8 pct from the previous quarter, above expectations for growth to remain unchanged from the first quarter at 0.7 pct.

Analysts said the data reinforce expectations for the Bank of England to lift interest rates to 6.0 pct later this year.

'These data should help to squeeze another quarter point out of the Monetary Policy Committee in the autumn,' said Ross Walker, economist at the Royal Bank of Scotland.

At Yield Change on

1608 BST pct previous close

Sept euribor future (Liffe) 95.625 up 0.01

Dec euribor future (Liffe) 95.450 up 0.025

GERMANY

Sept bund future (Eurex) 111.87 up 0.78

3.75 pct Jul 2017 govt bond 98.43 4.44 up 0.67

FRANCE

3.75 pct Apr 2017 govt bond 94.07 4.51 up 0.68

ITALY

4.00 pct Feb 2017 govt bond 95.08 4.69 up 0.59

Sept gilt future 104.76 up 0.74

4.00 pct Sept 2016 govt bond 90.65 5.30 up 0.66

Sept short sterling future 93.84 up 0.02

Dec short sterling future 93.75 up 0.04

rachel.armstrong@thomson.com

rar/jfr

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