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Bonds round-up: Threat of default stalks US markets

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Date: Thursday 06 Mar 2008

LONDON (ShareCast) - The threat of more potential defaults in the US market sent short –dated treasury bills soaring as investors again sought security.

News that mortgage fund Carlyle Capital Corporation, linked to the US private equity giant Carlyle, had failed to meet margin calls and could default on other loans sent the market scrabbling for government stock.

A Treasury spokesperson scotched speculation that the government would have to guarantee the mortgage agencies, sparking more buying.

The yield on the two-year note fell 9 basis points to 1.54% by midday while yields on 10-year notes dropped 8 basis points to 3.6%.

There was less panic in Europe where two-year government notes dropped as the European Central Bank hinted it won't cut interest rates because of accelerating inflation.

"The current monetary-policy stance will contribute'' to keeping inflation under control, ECB president Jean-Claude Trichet said after keeping the key Eurozone rate at 4%. Two-year bonds saw yields rise by 4 basis points to 3.31%, though the firm stance on inflation cut yields on the 10-year bunds by 6 basis points to 3.81%.

Ten year-gilts rose sharply as the Bank of England left interest rate on hold, as expected, at 5.25%. Yields shed nearly nine basis points to 4.4% as investors bet that this would be only a temporary halt to the downward cycle with May now tipped as the most likely month for another rate reduction.