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European Bonds Log Weekly Drop on ECB Interest Rate Outlook
By Gavin Finch
Nov. 18 (Bloomberg) -- European two-year government bonds posted their biggest weekly drop in more than a month on speculation the European Central Bank will keep raising interest rates into 2007.
Benchmark debt fell, pushing yields to near a four-year high, on concern the risk of inflation will prompt the ECB to keep lifting lending rates. Bonds fell yesterday after ECB officials Klaus Liebscher and Lucas Papademos said inflation persisted in the region and the bank will do what's needed to stabilize prices next year.
``The ECB is clearly still worried about inflation and so may raise rates again next year,'' said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. ``This will keep shorter dated bunds under pressure.''
The yield on the benchmark two-year note, more sensitive to changes in interest rate expectations than longer dated debt, rose 3 basis points in the week to 3.70 percent in London. The price of the 3.5 percent security due September 2008 fell 0.04, or 40 euro cents per 1,000 euro ($1,279) face amount in the week, to 99.64. Bond yields move inversely to prices.
Fellow ECB council members joined Liebscher and Papademos in voicing their concern this week that lending rates are too low and indicating further increases may prove necessary to curb inflation in the $10 trillion economy.
ECB policy makers Nicholas Garganas and Jose Manuel Gonzalez-Paramo both referred to the need for ``strong vigilance,'' a phrase that's been used to signal an imminent rate increase. Debt has fallen since ECB President Jean-Claude Trichet on Nov. 2 pledged ``strong vigilance'' on inflation.
`Hawkish Stance'
``We anticipate the ECB will maintain its hawkish stance even after its meeting in December,'' said Michael Rottmann, head of fixed-income and currency research at UniCredit Markets and Investment Banking in Munich, part of UniCredit SpA, Italy's largest lender. ``Trichet will hint at further rate increases.''
Two-year yields this week rose above those on 10-year debt for only the second time in more than six years as traders bet the central bank will crimp inflation as it lifts interest rates.
The spread, or gap, between two- and 10-year German securities inverted for the first time since August 2000 on Nov. 9, narrowing from 69 basis points at the start of December.
The narrowing of the yield spread has occurred as traders bet the ECB will keep raising rates, pushing shorter-dated yields higher. Ten-year yields haven't risen as sharply, on expectations higher borrowing costs will contain inflation in the euro region.
Traders have fully discounted two more rate increases by March with one more increase by year-end to 3.5 percent, futures prices show. The yield on the three-month Euribor futures contract for December was at 3.71 percent yesterday.
The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB's benchmark rate since 1999.
European Bonds Log Weekly Drop on ECB Interest Rate Outlook
By Gavin Finch
Nov. 18 (Bloomberg) -- European two-year government bonds posted their biggest weekly drop in more than a month on speculation the European Central Bank will keep raising interest rates into 2007.
Benchmark debt fell, pushing yields to near a four-year high, on concern the risk of inflation will prompt the ECB to keep lifting lending rates. Bonds fell yesterday after ECB officials Klaus Liebscher and Lucas Papademos said inflation persisted in the region and the bank will do what's needed to stabilize prices next year.
``The ECB is clearly still worried about inflation and so may raise rates again next year,'' said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. ``This will keep shorter dated bunds under pressure.''
The yield on the benchmark two-year note, more sensitive to changes in interest rate expectations than longer dated debt, rose 3 basis points in the week to 3.70 percent in London. The price of the 3.5 percent security due September 2008 fell 0.04, or 40 euro cents per 1,000 euro ($1,279) face amount in the week, to 99.64. Bond yields move inversely to prices.
Fellow ECB council members joined Liebscher and Papademos in voicing their concern this week that lending rates are too low and indicating further increases may prove necessary to curb inflation in the $10 trillion economy.
ECB policy makers Nicholas Garganas and Jose Manuel Gonzalez-Paramo both referred to the need for ``strong vigilance,'' a phrase that's been used to signal an imminent rate increase. Debt has fallen since ECB President Jean-Claude Trichet on Nov. 2 pledged ``strong vigilance'' on inflation.
`Hawkish Stance'
``We anticipate the ECB will maintain its hawkish stance even after its meeting in December,'' said Michael Rottmann, head of fixed-income and currency research at UniCredit Markets and Investment Banking in Munich, part of UniCredit SpA, Italy's largest lender. ``Trichet will hint at further rate increases.''
Two-year yields this week rose above those on 10-year debt for only the second time in more than six years as traders bet the central bank will crimp inflation as it lifts interest rates.
The spread, or gap, between two- and 10-year German securities inverted for the first time since August 2000 on Nov. 9, narrowing from 69 basis points at the start of December.
The narrowing of the yield spread has occurred as traders bet the ECB will keep raising rates, pushing shorter-dated yields higher. Ten-year yields haven't risen as sharply, on expectations higher borrowing costs will contain inflation in the euro region.
Traders have fully discounted two more rate increases by March with one more increase by year-end to 3.5 percent, futures prices show. The yield on the three-month Euribor futures contract for December was at 3.71 percent yesterday.
The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB's benchmark rate since 1999.
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