European 10-Year Bonds Rise for 1st Week in Three; Economy Weak
By John Beresford-Peirse
London, April 19 (Bloomberg) -- European 10-year notes rose for the first week in three on concern the region's economy won't recover soon, prompting the European Central Bank to lower its benchmark interest rate in coming months.
The economy of the dozen countries sharing the euro may have shrunk as much as 0.2 percent in the first quarter and may grow as little as 0.1 percent in the second, the European Union said. While ECB policy makers last week suggested the bank won't pare rates from a 3 1/2 year low of 2.5 percent next month, 21 of the 25 economists surveyed by Bloomberg News expect a cut in June.
``There's still a chance for further rate cuts in Europe in June'' or later, said Peter Mueller, a strategist at Commerzbank AG in Frankfurt, who expects one more quarter point rate cut this year. Europe's economy is ``not likely to be very strong over the next few months.'' Shorter-dated bonds will benefit the most from a rate cut, he said.
The German 4 1/2 percent January 2013 bund last week rose 0.27, or 2.7 euros per 1,000-euro ($1,088) face amount, to 102.58 late Friday. The yield fell 3 basis points to 4.17 percent. The yield on the 2 1/2 percent note due in March 2005 rose 4 basis points to 2.57 percent.
Germany's economy, Europe's biggest, has barely grown since a recession in the second half of 2001 as rising unemployment damps consumer demand and executives freeze investment.
Germany's six leading economic institutes said this week they expect the economy to grow 0.5 percent this year, compared with expansion of 1.4 percent predicted in October. The ECB is forecasting about 1 percent growth in the dozen nations sharing the euro this year.
ECB Rates
``European interest rates could fall below 2 percent this year on the back of weak data and falling inflation,'' said Steve Major, head of fixed-income strategy at HSBC Holdings. ``Europe will struggle to grow more than 1 percent this year.'' He recommends clients sell U.K. gilts and buy European government bonds with maturities of five years.
ECB President Wim Duisenberg, ECB council member Jean-Claude Trichet and Bundesbank President Ernst Welteke suggested they're in no hurry to pare rates.
The yield on the two-year note, among the securities most sensitive to interest rate changes, rose 7 basis points on Monday after Welteke said ``there is ample liquidity'' in Europe that is ``enough for higher growth.''
The June Euribor interest rate futures contract rose 9 basis points this week to 2.46 percent. That's up from 2.31 percent two weeks ago, suggesting investors are paring expectations for lower interest rates by then.
The rate on the September contract is 2.37 percent, compared with the current three-month money market rate of 2.56 percent, signaling more investors are looking for a cut at that time.
German Debt
Concern about Germany's debt rating may weigh on the country's bonds in coming months, some analysts said.
Germany risks losing its top AAA debt rating unless Chancellor Gerhard Schroeder takes steps to prevent the budget deficit from widening in a ``critical'' year, Standard & Poor's and Fitch Ratings said.
``This year is critical,'' said Konrad Reuss, S&P's managing director for European sovereign ratings. ``We want a reversal of deficit trends for Germany to keep its rating.''
While the company's outlook for Europe's largest economy is stable, the budget deficit, which will probably exceed the European Union's limit of 3 percent of gross domestic product this year, is ``problematic,'' Reuss said in an interview.
Germany's leading economic research institutes predict the deficit will be 3.4 percent of gross domestic product in 2003.
``The market is aware of the risk to Germany's rating,'' though Reuss's comments are significant as investors haven't heard him say it officially, said Daniel Pfaendler, a fixed-income analyst at Dresdner Kleinwort Wasserstein in Frankfurt.
German bond prices will drop if the rating is cut or the country is put on negative outlook, a sign the rating company's next move would be to downgrade the credit, Pfaendler said.
Last Updated: April 19, 2003 02:15 EDT |
