European 10-year bonds rose for a third week, with the benchmark German bund rounding out its first nine-day rally for more than two years, on speculation a UN report on Iraq's weapons program due tomorrow will reinforce demand for the safest securities.
The German 4 1/2 percent bund due in January 2013 yesterday rose 0.59, or 5.9 euros per 1,000-euro face amount, to 103.88. The last time it rose for nine consecutive days was Nov. 22 to Dec. 4, 2000. Its yield fell 7 basis points to 4.02 percent, the lowest since May 1999, bringing the weekly decline to 16 basis points. A basis point is 0.01 percentage point.
"Yields have come down very quickly but investors have got nothing to lose by waiting and seeing" what the inspectors' report will say, said Daragh Maher, an economist at ING Barings Ltd. "The overriding concern for the market is rising tensions in the Middle East, so the trend is still favorable for bonds."
Bonds have gained and stocks fallen on concern there may be war with Iraq. The inspectors will report to the UN Security Council Monday on what chief inspector Hans Blix said are ``mixed'' results monitoring Iraq's chemical, biological and nuclear arms programs.
The Dow Jones Stoxx 50 Index, which has lost 6.5 percent this week, yesterday had its lowest close since May 1997.
"Iraq will be the main focus for the bond markets over the next few weeks," said Maurice Meyers, who helps manage 30 billion euros (US$32 billion) in fixed-income assets at Robeco Group in Rotterdam. News on Iraq will probably "keep stocks depressed, which will help bonds."
Meyers said he's not going to sell any bonds until the events of next week become clear. As well as the arms inspectors' report on Monday, US President George W. Bush will give his State of the Union speech on Tuesday, and the Federal Reserve announces its decision on interest rates Wednesday.
The publication of the UN report Monday "will increase investor nervousness" about the prospect of a war, bolstering bonds, said Ian Douglas, chief bond strategist at UBS Warburg.
There won't be a "significant rise in yields until the fog of war retreats somewhat."
The US will have about 185,000 Navy, Air Force and Army troops in the Persian Gulf by mid-February, ready to take military action if Iraq fails to disarm. The UK is sending about 30,000 troops.
The yield on the 3 percent note due in December 2004 fell 3 basis point to 2.54 percent, the lowest since at least 1990, when Bloomberg records begin.
Bonds may also get a lift from speculation a faltering economy in the countries sharing the euro will prompt the European Central Bank to cut its key rate from 2.75 percent, analysts said.
Germany's economy, Europe's biggest, grew in 2002 at the slowest pace in nine years, a report last week showed. German business confidence stood at an 11-month low in December, and consumers were more pessimistic than at any time in the past eight years.
"You can't go against the trend" for higher bond prices, said Steve Major, head of fixed-income strategy at HSBC Holdings.
Major favors shorter-dated bonds because of the chance the ECB will cut interest rates, although he recommends investors sell notes maturing in two years and buy those maturing in three or four years.
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