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Bonds round-up: Inflation fears quell bonds

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Date: Wednesday 13 Feb 2008

LONDON (ShareCast) - An unexpected rise in US retail sales prompted a sell-off of US treasuries while in the UK gilts were little changed following the release of the Bank of England’s inflation report which suggested that the central bank is taking a harder line on inflation risk.

The Bank of England's latest quarterly inflation assessment suggested prices could surge if it cut rates too far.

Bank forecasts indicated inflation could stay well above the central bank's 2% target for two years if rates were cut to 4.5% by the end of this year, though inflation would hit its target rate if rates stayed at around the current level of 5.25%.

Economists suggested this could mean one more rate cut this year rather than the three some had been predicting.

The yield on the benchmark 10-year gilt was little changed at 4.62%.

In the US, treasury notes fell back after retail sales rose 0.3% in January, after declining 0.4% in December. Observers had been expecting a fall in retail sales. The willingness of the consumer to carry on spending in the current environment calls into question the need for the Federal Reserve to rush through further interest rate cuts.

The yield on the benchmark 10-year treasury note rose 3 basis points to 3.69%.

In Europe, government bonds fell a fraction after the release of the Bank England report and a move by Sweden’s central bank to increase borrowing costs in an attempt to rein in inflation. The yield on the benchmark 10-year bund rose 1 basis point to 3.96%.