European Bonds Post Longest Losing Run in 15 Years After Ifo
By Anchalee Worrachate
Dec. 19 (Bloomberg) -- European bonds fell for an 11th day, the longest losing streak in more than 15 years, after business confidence in Germany unexpectedly surged in December.
Yields on two-year government bonds, among the most sensitive to the outlook for interest rates, rose to the highest since July 2002 as optimism among German executives suggests faster growth in the region's largest economy. Traders raised bets after today's report that the European Central Bank will increase rates twice more.
``We are bearish on bonds,'' said Guy Skinner, who helps oversee about $4.9 billion in global debt at Morley Fund Management Ltd. ``The survey suggests the outlook for growth in the euro area is quite strong. The ECB is likely to raise rates by more than the market is pricing in.''
The yield on the benchmark German two-year note rose 2 basis points to 3.82 percent at 4:43 p.m. in London. The price of the 3.75 percent note due December 2008 fell 0.04 or 40 euro cents per 1,000 euro ($1,317) face amount, to 99.87.
The two-year yield has climbed 95 basis points this year, heading for the biggest annual advance since 1999.
The Munich-based Ifo institute's sentiment index, based on responses from 7,000 executives, climbed to 108.7, its highest since at least 1990. Economists expected the index to remain at 106.8, unchanged from November, according to the median of 43 estimates in a Bloomberg News survey.
German Reunification
The losing run in bonds is the longest since 1991, when welfare spending surged after the reunification of East and West Germany and the Bundesbank pushed up rates to head off inflation.
This year bond prices have declined as expansion quickened in the economies of the 12-nations that share the euro, the ECB increased its benchmark borrowing cost six straight times, and policy makers said they still need to act to cool price rises.
``Our monetary policy continues to be accommodative,'' ECB President Jean-Claude Trichet said after the central bank lifted the key rate a quarter point to 3.5 percent on Dec. 7.
Council member Klaus Liebscher said on Dec. 15 that it's wrong to think the ECB is done raising rates.
A report today showed German producer-price inflation accelerated for the first time in six months during November. Prices of goods leaving factory gates climbed 4.7 percent from a year earlier, compared with a 4.6 percent increase in October.
``Bad news for bonds,'' said Richard McGuire, a fixed- income strategist at Royal Bank of Canada Europe Ltd. ``Today's survey supports expectations the ECB will tighten policy on two further occasions.''
Rate Futures
Traders are betting on at least one more rate increase from the ECB next year, futures prices show.
The yield on the three month Euribor futures contract for June gained 3 basis points to 4 percent today, after rising by 7 basis points last week. The market is fully priced in for a quarter point rate increase by the ECB by the end of March.
The yield on the September contract was up 4 basis points at 4.04 percent today, suggesting investors attached a 32 percent chance to the ECB raising rates to 4 percent by September.
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.
``Our view is that the ECB will take interest rates to 4 percent,'' said Adrian Grey, head of fixed income at Insight Investment Management, which oversees assets of about $120.68 billion. ``The front end of the European bond market hasn't been a place to be, and will not be a place to be going forward,'' he said, referring to bonds maturing in two to five years.
Consumer Prices
European debt fell last week as a report showed consumer- price inflation in the euro-region quickened for the first time in seven months in November. Prices rose 1.9 percent from a year earlier after a 1.6 percent gain in October, Eurostat, the European Union's statistics office, said on Dec. 15.
The European Commission also said yesterday that U.S. economy's slowdown should have only a ``limited'' effect on the expansion in the dozen euro nations.
The euro rose the most in two weeks versus the dollar after the Ifo, reaching $1.3160, from $1.3098 yesterday in New York.
Bonds extended losses after a U.S. report showed housing starts rebounded from the lowest level in more than six years.
Builders broke ground on new dwellings at an annual rate of 1.588 million units last month, more than the 1.54 million units forecast by economists in a Bloomberg survey.
To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net ;
Last Updated: December 19, 2006 11:44 EST |
