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Bonds round-up: Flight to safety

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Date: Friday 09 May 2008

LONDON (ShareCast) - Credit crunch concerns returned to haunt US equity markets, sparking a return to favour of government bonds.

Yesterday’s cash raising plans by US insurance giant AIG to repair its balance sheet after more massive write-downs, and today’s announcement by Citigroup that it will run down $400bn of assets suggested that recent optimism that the worst of the liquidity crisis is behind us may have been misplaced.

US treasury prices responded by advancing briskly, with two-year notes rising for the fifth day in succession. Yields on two year notes fell 2 basis points to 2.20%, while at the longer end, yields on 10-year notes fell 3 ticks to 3.75%.

The US trade deficit contracted more than expected, as US consumers tightened their belts and spurned imported goods, but this had little impact on sentiment. The deficit narrowed to $58.2bn in March from $61.7bn, although it was not all good news, as exports showed a monthly decline for the first time in a year.

European government bonds also capped a successful week, rising strongly today. The yield on the benchmark 10-year bund fell below 4%, slipping 7 basis points to 3.99%.

In the UK, gilts advanced on expectations that the Bank of England will cut interest rates next week as economic indicators continue to point to signs of a weakening economy.

The number of home repossession claims in England and Wales soared by 16% in the first quarter of 2008 from the same time last year, near to levels last seen in the recession of the early nineties.

Almost 39,000 mortgage possession claims were issued on a seasonally adjusted basis, that’s 7% higher than in the fourth quarter of 2007, said the Ministry of Justice Friday.

The yield on the benchmark 10-year bond fell 4 basis points to 4.58%. Yields on bonds fall as the underlying price rises.