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Bonds round-up: US treasuries ease on inflation fears

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Date: Wednesday 02 Apr 2008

LONDON (ShareCast) - US treasuries declined in the wake of a statement from Federal Reserve chairman Ben Bernanke which appeared to dampen prospects of further interest rate cuts.

The Fed now expects inflation to moderate in coming quarters, as commodity prices top out. However, some indicators of inflation expectation have risen and overall uncertainty about the inflation outlook has increased. “It will be necessary to continue to monitor inflation developments carefully in the months ahead,” Bernanke said.

Meanwhile, a report from employment firm ADP Employer Services indicated that 8,000 staff were added to US company payrolls in March, confounding economists who had expected a fall of around 45,000.

The real damage to US treasury prices was done at the shorter end, and the yield on the two-year treasury note rose 9 basis points to 1.89%. The yield on the 10-year note moved up 3 ticks to 3.59%.

European bonds also declined, but were off the bottom in late afternoon trading, after US factory orders showed a 1.3% decline in February, compared to a 0.8% fall expected by economists.

Producer prices data for the euro zone had little impact, as the index rose 0.6% in February, in line with forecasts.

The yield on the 10-year bund advanced 2 basis points to 4%.

In the UK, gilts were little changed but marginally firmer on balance on the back of weak economic data.

Mortgage approvals fell a little less than feared during February, but the numbers still remain near their worst in almost a decade.

Figures from the Bank of England showed that 73,000 loans were approved for UK house purchases, down from 74,000 in January, but better than the drop to 72,000 expected.

Meanwhile, ativity tailed off in the UK construction sector during March for the first time in over six years, according to a new report released today.

The Chartered Institute of Purchasing and Supply’s purchasing managers’ index for the construction sector sank to 47.2 last month from 52.4 in February.

It was the first read of below 50, an indication of contraction for the sector, since November 2001 and was far worse than the read of 52 expected by economists.

The yield on the benchmark 10-year gilt eased 1 basis point to 4.43%.