European government bonds remain lower after hawkish comments from ECB officials

European government bonds remain lower after hawkish comments from ECB officials

	Published : Mon, 29 Jan 2007 18:44 By : Agencies Print this Story

LONDON (AFX) - European government bonds remained lower as a string of hawkish commentary from European Central Bank officials continued to suggest that euro zone interest rates will be heading higher.

There were no significant European data releases today, though bond market participants remain wary ahead of euro zone and German data later in the week which are expected to show a spike in inflation in response to the rise in the German VAT rate.

'There was no European data to push prices lower today with the main drivers being a continuance of hawkish rhetoric from ECB members and bearish sentiment,' said David Corbell at Thomson IFR Markets.

Speaking on French television today, ECB president Jean-Claude Trichet warned there is a risk of inflation accelerating in the euro zone, and made particular note of the possibility of knock-on effects on wages from past rises in oil and petrol prices.

'We have a risk that an inflationary spiral could develop,' he said.

Meanwhile, in an interview with Die Welt, Weber also highlighted the risk of overly high wage increases, which he said may necessitate further interest rate rises.

'If the next round of wage bargaining results in levels that are too high and one that puts price stability at risk, further increases in interest rates could be necessary,' he was cited as saying.

The comments followed Friday's very strong euro zone money supply growth figures, as well as hawkish comments over the weekend by ECB board member Lorenzo Bini Smaghi, which have confirmed market expectations that euro zone interest rates will rise to 3.75 pct in March and probably again after that.

Meanwhile, market players are also nervous ahead of a key week for US data, including crucial monthly jobs data on Friday, as well as the ISM survey on the US manufacturing sector on Thursday.

If data continue to come in on the strong side, this will again reduce expectations that the Federal Reserve will cut interest rates soon and could reignite speculation that they may opt for another hike.

Attention this week will also focus on Wednesday's latest meeting of the US Federal Reserve as well as the first estimate of fourth-quarter US GDP growth.

Over in the UK meanwhile, gilts were also weak, though pared earlier losses after 10-year yields went above the 5.00 pct mark to reach their highest level since September 2004.

The losses set in after this morning's retail sales survey from the Confederation of British Industry came in substantially above market expectations and further added to speculation that the Bank of England will opt for a back-to-back interest rate hike next month.

The CBI said 51 pct of retailers reported January sales volumes were higher than a year ago, against 21 pct who said they were lower. The ensuing net balance of +30 pct is the highest since December 2004's +33 pct and way above expectations for a drop to +9 pct.

'The Monetary Policy Committee will take one look at this and be biased towards another early rate move, quite possibly as soon as next month's meeting in February,' said David Brown at Bear Stearns.

At Yield Change on

1720 GMT pct previous close

March euribor future (Liffe) 96.08 dn 0.005

GERMANY

March bund future (Eurex) 114.74 dn 0.26

3.75 pct April 2017 govt bond 97.05 4.12 dn 0.01

FRANCE

3.25 pct April 2016 govt bond 93.28 4.14 up 0.01

March gilt future 106.04 dn 0.17

4.00 pct Sep 2016 govt bond 92.38 5.00 unchanged

March short sterling future 94.27 unchanged

jessica.mortimer@thomson.com

jkm/slm

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