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Date: Friday 20 Jun 2008

LONDON (ShareCast) - With US equities opening lower on concerns over the deteriorating health of the financial sector, investors are seeking safety in the form of government bonds.

Demand for US treasuries has been further boosted by receding fears of an interest rate rise. Traders now assign only a 10% probability to the chance of the Fed hiking its key lending rate when it meets next Wednesday.

The yield on two-year Treasury notes is down 10 basis points to 2.84% while the yield on the benchmark 10-year note falls 8 ticks to 4.13%.

In the UK gilts also rose strongly, rallying from yesterday’s setback, with the yield on the 10-year gilt tumbling 10 basis points to 5.14%. Gilts came under selling pressure yesterday after retail sales figures unexpectedly rose in May, prompting fears that the Bank of England might interpret the data as clearing the way for an interest rate rise.

Comments from the Bank’s deputy governor, John Gieve, calmed rate rise fears, however. Gieve said last night that “more timely” consumer spending surveys show signs of waning spending on the High Street.

European government bonds underperformed their British counterparts but still notched up healthy gains as investors turned their back on equities.

The yield on the 10-year German bund dived 6 basis points to 4.62% despite German producer prices rising 6% in the year to May, the biggest annual gain in almost two years and higher than the 5.8% rise expected by economists.

In other economic news, the eurozone inflation rate rose to 3.7%, its highest level since 1992, after showing a 3.3% year-on-year rise in April.

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