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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Paul Kern who wrote (81747)	5/14/2007 7:48:39 AM
From: Paul Kern	Read Replies (1) \| Respond to of 110194

European Bonds Drop, Pushing Yields to Five-Year High, on Rates By Gavin Finch and Agnes Lovasz May 14 (Bloomberg) -- European government debt fell, sending yields on two-year notes to the highest in almost five years, on expectations the region's central bank will raise interest rates twice more this year. The extra yield investors earn on 10-year U.S. Treasuries over similar maturity German bunds today shrank to the least since 2004 as economic growth in Europe is set to outpace U.S. expansion. European Central Bank President Jean-Claude Trichet pledged ``strong vigilance'' on inflation last week, signaling borrowing costs will rise in June for an eighth time since 2005. ``It's not an easy time for bond investors at the moment,'' said Christian Zima, a fixed-income manager in Vienna at Raffeisen KAG, which oversees the equivalent of $24 billion of bonds. ``The economic momentum is high. There's no major spillover from the U.S. slowdown.'' The yield on two-year notes, which are among the most sensitive to interest-rate expectations, rose 3 basis points to 4.19 percent by 12:03 p.m. in London, after earlier touching 4.22 percent, the highest since June 2002. The price of the 3.75 percent note due March 2009 fell 0.05, or 50 euro cents per $1,000 face amount, to 99.23. The two-year yield has risen 30 basis points since the end of December as economic growth fans inflation. The 10-year bund yield climbed 3 basis points to 4.25 percent today, after reaching 4.27 percent, the highest since July 2004. Debt prices declined last week after the European Commission raised its forecast for growth in 2007 to 2.6 percent, close to the six-year high of 2.7 percent last year and ahead of the U.S. for the first time since 2001. Euro Region Growth European interest-rate futures suggest investors are increasing bets the ECB will raise rates twice more this year, with the yield on December contracts up 3 basis points to 4.375 percent today. The contracts settle to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB's benchmark since 1999. ``The economy of the euro region will grow faster than expected,'' said Angelo Drusiani, who manages the equivalent of $1.9 billion of bonds at Banca Albertini Syz & C. in Milan. The expansion is ``one of the things not frightening central banks, but concerning them.'' European policy makers, who met in Dublin last week, kept their refinancing rate at 3.75 percent, as predicted by all 45 economists in a Bloomberg News survey. The bank will raise the rate to 4 percent in June, a separate survey predicts. `Done Deal' ``It's a done deal that they're definitely going to raise rates by another 25 basis points in June,'' said Craig Veysey, global head of bond products at Scottish Widows Investment Partnership in Edinburgh. ``That was made quite clear from the statement we got in the press conference. `Strong vigilance' was mentioned several times.'' The gap, or spread in yields, between 10-year European notes and similar-maturity U.S. Treasuries narrowed to 41 basis points today, the least since November 2004. ``The ECB will keep tightening until something tells them to stop,'' said Richard McGuire, a bond strategist at Royal Bank of Canada in London. ``Gross domestic product keeps expanding. Yields have yet to fully price-in the interest-rate outlook.'' To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net ; Agnes Lovasz in London at alovasz@bloomberg.net Last Updated: May 14, 2007 07:05 EDT