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Bonds round-up: Inflation fears a drag on markets

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Date: Wednesday 20 Feb 2008

LONDON (ShareCast) - Gilts fell back today following the release of the minutes from the last interest rate setting meeting from the Bank of England’s Monetary Policy Committee. All but one of the policy-makers were satisfied with a quarter point cut, with just habitual renegade David Blanchflower calling for a 50 basis point cut.

The minutes revealed enduring concerns about inflation, though decision makers noted a continuing decline in housing market activity, with mortgage approvals for house purchase reaching their lowest since 1995. They also highlighted an apparent easing of consumption growth and a 0.4% fall in retail sales volumes in December, the worst since January 2007.

The yield on the benchmark 10-year gilt rose 4 basis points to 4.68%.

In Europe, inflation fears were also uppermost in the minds of investors after US and German inflation data showed the cost of living quickening.

US consumer prices data showed a 0.4% increase in the cost of living in January, the same as in December but higher than anticipated.

The 5.2% pay award won by IG Metall, Germany’s biggest trade union, was almost certainly higher than the European Central Bank would have liked to have seen as it continues its fight against inflation, with maintained interest rates its primary weapon.

The yield on the benchmark 10-year bund edged 2 basis points higher to 4.02%.

In the US, investors were less concerned about the US inflation data than they were about a revival of credit worries after the Financial Times reported that KKR Financial Holdings, a unit of private-equity firm KKR, had delayed repayment of billions of dollars of debt.

Demand for the safe harbour of government debt pushed US treasury prices higher and the yield on the benchmark 10-year treasury note eased one basis point to 3.89%.