European Bonds Fall on View ECB Will Refrain From Cutting Rate
European government bonds fell for a second day on speculation the threat of inflation will deter the European Central Bank from lowering interest rates, even as economic growth slows.
The decline pushed the yield on the 10-year German bund up from the lowest in a month after the central bank held its main rate at 4 percent yesterday. ECB President Jean-Claude Trichet said policy makers will act “preemptively” to combat inflation, which will stay above the 2 percent target “in coming months.”
“Trichet made it very clear the ECB stands ready to act if necessary,” said Elwin de Groot, a market strategist at Rabobank Groep in Utrecht, the Netherlands. “There were some quite hawkish comments in there.”
The yield on the 10-year note, Europe’s benchmark, rose 3 basis points to 4.12 percent by 11:40 a.m. in London. The price of the 4 percent bond due January 2018 dropped 0.26, or 2.6 euros per 1,000-euro ($1,477) face amount, to 99.03. The bonds headed for a second weekly gain.
Two-year note yields were little changed at 3.75 percent. Yields move inversely to bond prices.
The ECB predicts inflation will accelerate to about 2.5 percent this year, the ninth year prices have risen in excess of the ECB’s target, from 2.1 percent in 2007. Euro-region growth will slow to about 2 percent in 2008, from around 2.6 percent last year, according to the bank’s December forecasts.
Earlier Rally
European government bonds rallied earlier as signs that losses linked to the U.S cash advance loan. subprime-mortgage market collapse are worsening stoked appetite for the safest assets. Asian and European stocks tumbled.
Federal Reserve Chairman Ben S. Bernanke said yesterday deeper rate cuts “may well be necessary” to stave off a recession.
Merrill Lynch & Co., the third-largest U.S. securities firm, may write down $15 billion related to U.S. mortgage losses, almost twice its original forecast, the New York Times reported.
UBS AG, Europe’s biggest bank by assets, said today that 2008 will be a “difficult” year for the financial-services industry. The Swiss-based lender wrote down the value of debt securities and leveraged loans by $14.7 billion last year, adding to more than $100 billion in markdowns and loan losses announced by the world’s largest banks and securities firms.
“The reports about further losses at Merrill and that Bernanke opened the door wide for further rate cuts” underpinned German bunds, said Marius Daheim, a senior bond strategist at Bayerische Landesbank in Munich. “For Europe, this implies an increased risk of cooling of the economy. We’ll probably lower our yield forecasts by 20 to 40 basis points.”
Italy will offer 4.25 percent bonds due 2012 and 5 percent debt maturing in 2039 today in the last of this week’s government bond auctions.
Filed under: Banks, UK, business, finance, lenders, mortgage, news by Specialist