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Bonds round-up: Inflation fears spook bonds

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Date: Thursday 14 Feb 2008

LONDON (ShareCast) - US Treasuries are lower today as Federal Reserve Chairman Ben Bernanke indicated the US central bank is not done yet with cutting rates if more are necessary to provide “adequate insurance” against threats to economic growth.

Although interest rate cuts are usually regarded as giving a boost to fixed income securities, concerns are increasing that the wave of rate cuts may let the inflation genie back out of the bottle – and inflation is bad for fixed income returns.

An improvement in the US balance of trade position also dimmed the appeal of government debt. The gap between imports and exports narrowed 6.9% in November to $58.8bn from $63.1bn.

As US Treasuries rose, so the yield on the benchmark 10-year Treasury note rose 5 basis points to 3.78%.

European government bonds retreated, as they have done all week, with investors preferring to place their money into equities. The decline in prices pushed the yield in the benchmark 10-year bund up to the 4% level for the first time in a fortnight.

Gross domestic product in the euro zone rose 0.4% in the fourth quarter after rising 0.8% in the third quarter.

UK gilts also fell back today, with the yield on the benchmark 10-year gilt rising 4 basis points to 4.68%. The UK’s Debt Management Office said its auction of £2bn Treasury 4.25% 2042 stock was covered by bids 1.63 times. The highest accepted price was £99.68, giving a yield of 4.518%, while the lowest accepted bid was £99.44 with a yield of 4.532%.