20000329

Bond Markets Yields up as rate outlooks sour

LONDON: Government bond yields across markets moved higher on Monday as investors continued to re-assess the interest rate outlooks of the major economies.

There was little prominent data for bond markets to focus on Monday, leaving events of last week which raised fears of rising interest rates setting the tone.

In the latter part of last week, minutes to February's Federal Open Market Committee (FOMC) meeting revealed some members were in favour of a 50 baisis point hike and this led to a bond market sell-off.

Analysts said investors on Monday were continuing to sell bonds on the back of the FOMC minutes as they think U.S. interest rates will now rise steeper than expected.

"The markets are taking on board the fact that there is an increasing risk the Fed could move to a more aggressive tightening and there is now speculation they could move by 50 basis points in the meeting in May," said Nick Stamenkovic, senior bond strategist at IDEAglobal.com.

By 1614 GMT, the 10-year benchmark price had fallen 7/32 from Friday's close in New York to 102-01 to yield 6.221 percent. The 30-year was down 3/32 at 103-15 to yield 5.999 percent. European government bond yields moved higher under the combined weight of weaker U.S. Treasuries and plans for strike action by Germany's powerful IG Metall union. "There are expectations that the Fed is going hike more than what was previously thought and there's a spillover effect into Europe," said Elisabeth Afseth, fixed-income analyst with Williams de Broe.

Germany's IG Metall union signalled warning strikes at DaimlerChrysler AG as part of a wages battle, rattling the nerves of European policy makers and large firms in the German engineering sector alike.

The European Central Bank has been hyper-sensitive on pay talks in Europe's largest economy and has warned that excessive increases could trigger higher wage settlements across the euro zone and cause prices to rocket.

Indeed, euro zone debt prices dipped after ECB council member and Bank of Portugal governor Vitor Constancio said that high German pay rises could raise unemployment and warned the ECB would use monetary instruments to ensure mid-term inflation did not exceed two percent.

The yield on the benchmark 10-year German Bund was six basis points higher at 5.308 percent while the key June Bund future was down 0.48 at 104.65.

British government bonds (gilts) were also dragged down by the international environment but were further bogged down by fears that last week's budget was more expansionary than first thought.

"Weekend press reports suggest the markets have interpreted the budget too lax and hence the MPC will have to hike rates higher than was previously expected," said Stamenkovic.

He said this had led to a sharp steepening in the short sterling strip and to a sell-off across the gilt curve.

The 10-year gilt/Bund spread widened by around five basis points to 13 basis points over the day.

In futures, the June gilt future fell by over a point, down 1.06 to 113.49.

The market was closely watching a meeting in Vienna of Opec oil ministers where they are looking to forge a deal for a supply increase that will dampen oil prices and ease worries about inflation.

Oil prices recently hit nine-year highs and raised concerns that central banks may have to raise rates to quell their inflationary affect.

"Oil prices have already fallen very sharply so unless we see something above two million barrels a day further downside for oil prices is pretty limited so the scope for bonds to benefit is sonwhat limited," Stamenkovic said.-Reuters