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Bonds round-up: Gilts up, but lag bunds and treasuries

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Date: Monday 10 Mar 2008

LONDON (ShareCast) - Government bond prices tended higher again today as credit crunch worries continued to nag away at investors.

US treasuries raced ahead, pushing the yield on the benchmark 10-year note down 8 basis points to 3.45%, in anticipation of a three-quarter point cut in US interest rates by the Federal Reserve next week.

Gains were reined in a little as hopes that the Fed would rush through a rate cut ahead of next week’s scheduled meeting faded, with many arguing that such a panicky move might prove counter-productive in terms of settling the market’s nerves.

European government bonds moved up, pushing the yield on the benchmark 10-year bund down 6 basis points to 3.67%, a level not seen in over a year.

The continued strength of the euro is threatening to restrain growth in the European economy according to European Commission President Jose Manuel Barroso, as quoted by Le Journal du Dimanche.

However, the German economy seems to be holding up well, judging by export sales which rose 3.8% (seasonally adjusted) in December, in the biggest monthly rise since September 2006. Economists had been predicting a rise of around 1%.

In the UK, gilts underperformed their European counterparts following alarming UK Producer Prices data this morning.

Factory gate inflation remained at its highest in 16 years, with manufacturers’ input prices leaping 1.7% during February and 19.4% for the year, due to the soaring cost of oil and raw materials.

Despite a weaker than expected 0.3% increase in non-seasonally adjusted output prices, the annual rate of factory gate inflation of 5.7% was still the highest since July 1991.

The data gives little encouragement to those banking on an interest rate cut when the Monetary Policy Committee of the Bank of England next meets to determine interest rates.

The yield on the benchmark 10-year gilt eased 2 basis points to 4.3%.