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Bonds round-up: Interest rates expected to rise

Date: Wednesday 13 Jan 2010

Yields on US Treasury bonds are expected to rise over the coming months as investors worry about the size of government debt.

There are no signs of any sharp reduction in debt levels. President Obama is expected to ask Congress for $33bn of additional funding for troops in Afghanistan.

Commodity prices are falling with oil prices hit by larger than expected stocks of refined products.

US Treasury bonds lost some of yesterday’s gains. The two-year yield was up nearly two basis points to 0.92%, while the ten-year yield was just over two basis points ahead at 3.73%.

The Federal Reserve's Beige Book on economic conditions will be published later.

UK gilts also fell back after comments about UK interest rates by Andrew Sentance, a member of the Bank of England's Monetary Policy Committee, who warned that interest rates might rise this year if inflation starts to tick up.

In an interview in the Guardian, Sentance said it would be wrong for markets to assume interest rates would stay at 0.5% for the duration of 2010.

Two-year yields rose three basis points to 1.22%, while ten-year yields were up a similar amount to 3.95%.

November’s industrial production figures came in slightly better than expected. The UK Industrial Production Index showed a 0.4% rise in November, better than the 0.3% rise economists had been predicting and an improvement on October’s revised performance of a 0.1% fall. November’s index was still 6% lower than in the corresponding month of 2008.

Manufacturing output remained unchanged from October’s level, which in turn was unchanged from September’s. Economists had been expecting manufacturing output to rise by 0.3%. On a year on year basis, manufacturing output in November was down 5.4%, compared to an annual decline of 7.8% in October.

German bunds rose after news about the shrinking German economy. Two-year yields were down one basis point at 1.2% and ten-year yields were two basis points lower at 3.3%.

The German economy shrank 5% in 2009, the biggest contraction since the Second World War. The Federal Statistical Office (Destatis) said the slump occurred mainly in the winter half-year of 2008/2009.

‘Over the year, there were signs that the economic development would slightly stabilize on the new, lower level,’ Destatis reported in a statement. ‘What was striking in 2009 is that both exports and capital formation in machinery and equipment slumped heavily.’

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