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Bonds round-up: Inflation fears prompt collapse

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Date: Monday 09 Jun 2008

LONDON (ShareCast) - Fears that central banks are now more likely to consider raising rates than lowering them sent government bond prices crashing today.

The spectre of inflation is prompting central banks to take a more hawkish approach to interest rates.

In the UK today, producer prices data for May made grisly reading. Factory gate inflation soared last month by the most since comparative records began in 1986, putting even more pressure on the Bank of England to step up efforts to control inflation.

Surging food and petrol costs sent the overall output price index up 8.9% in the year to May, figures from the Office for National Statistics (ONS) revealed Monday.

The increase of 1.6% between April and May this year was the biggest monthly hike since March 1981, fuelled by higher food, energy and scrap metal costs.

Gilts hurtled into reverse on the news, with the yield on the 10-year benchmark gilt rising 15 basis points to 5.15% while two-year yields rose 32 basis points to 5.39%.

Inflationary concerns transmitted across the Atlantic, pushing down US treasury prices. The yield on two-year notes rose 20 ticks to 2.58%, while the yield on 10-year notes jumped 11 basis points to 4.03%; shorter-dated bonds are more sensitive to base rate changes.

European bonds proved more resilient than their US and British counterparts, though possibly only because Europen Central Bank president Jean-Claude Trichet had already rattled the market’s cage with talk of the ECB considering a rate rise when it next meets.

The yield on the 10-year bund rose 8 basis points to 4.5%.

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