20000324

Bond Markets Major govt bond yields fall sharply

LONDON: Major government bond yields fell sharply on Thursday as U.S. Treasuries benefited from a flight-to-quality bid from agency issues and European bonds welcomed positive news on the supply front.

"Sentiment has turned more positive in Europe. Technical factors have improved, we had some good supply news today and the euro firmed a bit," said Nick Stamenkovic, senior bond strategist with IDEAglobal.com in London.

"Over in the U.S., comments overnight by Treasury Under Secretary (Gary) Gensler caused a bit of panic selling and Treasuries benefited from their safe haven status."

At 1705 GMT, the yield on benchmark 10-year U.S. Treasuries was down 8.3 basis points at 6.04 percent. The benchmark 10-year Bund was yielding 5.193 percent, down 5.8 basis points, while the June Bund future FGBLM0 was up 0.47 at 105.57. The Bund yield last closed below 5.2 percent in December of last year.

In the U.S., assets were reallocated to government debt from agency issues after Gensler said creditors and investors should understand that there were no explicit or implied government guarantees for Fannie Mae and Freddie Mac agency debt.

Agency debt has been seen as a viable alternative to Treasury benchmark issues, which are declining in size as the government cuts issuance and buys back older debt.

U.S. mortgage agency Freddie Mac priced a $5 billion 10-year reference note at 105 basis points over Treasuries after agency spreads widened sharply.

In Europe, yields fell as Germany unveiled a lighter than expected second quarter debt issuance calendar and a positive technical picture buoyed the market.

Dealers said weak equities also supported bonds as euro debt broke through key resistance levels.

"It is difficult to find anyone who wants to sell the market here. As long as the front end, particularly in Europe, stays firm, it is very difficult to see how the long end will go down," a London trader said.

The euro currency EUR firmed after the Swiss National Bank raised interest rates by more than expected. It was also boosted after European Central Bank Vice President Christian Noyer said he saw strong upward potential for the euro against the dollar "rather soon".

Germany said it would issue some 20 billion euros worth of debt in the second quarter of this year, below analysts' expectations for 25-30 billion euros of new debt.

"The issuance calendar seems to have been taken well as it was at the lower end of expectations," said Philip Tyson, market bond strategist at HSBC.

There was little reaction to earlier German producer price data showing a 0.2 percent increase in February and 2.4 percent on the year - its highest level since March 1992.

Euro zone industrial production data was a touch more robust than expectations. December production rose by 3.9 percent, against a forecast 3.8 percent but this had no impact.

British government bonds (gilts) prices were also up after a Confederation of British Industrial trends survey showed a deterioration in manufacturing in March.-Reuters