Sun, Mar 09, 2003 - Page 10 News List

Notes gain for fifth week as ECB seen trimming rates


European two-year notes completed their fifth consecutive week of gains on speculation the central bank will cut interest rates in coming months to help revive the region's US$7 trillion economy.

The European Central Bank trimmed its key lending rate by a quarter percentage point to 2.5 percent on Thursday. The bank's president, Wim Duisenberg, said the outlook for the economy of the 12 countries sharing Europe's common currency has "weakened," as unemployment rises and economic growth stalls, amid concern the US may attack Iraq.

"The outlook for growth and inflation" will help bonds, said Justin Excell, head of European government bond trading at Barclays Capital. "If Iraq were solved tomorrow, you would still have the same economic problems."

The German 3 percent note due December 2004 rose 0.07, or 0.70 euro per 1,000-euro (US$1,095) face amount, to 101.33 in the week. Its yield fell 5 basis points to 2.21 percent. The yield on the 4 1/2 percent bund due January 2013 fell 8 basis points to 3.83 percent in the same period. A basis point is 0.01 percentage point.

Unemployment in the euro-sharing countries rose to 8.6 percent in December, and Germany, the region's largest economy, didn't grow last quarter. Signs of slower growth tend to boost demand for fixed-rate government debt.

The spread, or difference in yield, between the German two-year note and the equivalent US government note has narrowed 3 basis points since February to 0.84 percent, signaling investors are prepared to pay more to own German bonds.

Bonds extended gains after a report yesterday showed the US economy lost 308,000 jobs in February, the most since the aftermath of the Sept. 11 attacks. The jobless rate in the world's biggest economy rose to 5.8 percent from 5.7 percent in January.

Demand was also boosted as investors sought securities such as sovereign debt and gold on concern a US-led attack against Iraq will come by the end of the month. The prospect has cut the yield on the 10-year bund by 34 basis points this year.

US President George W. Bush said on March 6 the US will attack Iraq even if the UN Security Council doesn't authorize a second resolution forcing Baghdad to disarm.

Pressure from other countries has helped UN weapons inspectors do their job in Iraq, chief inspector Hans Blix told the Security Council.

"Bonds will trade on the basis we could come in on Monday and be staring war in the face," said Ray Attrill, an analyst at economic research firm 4Cast Ltd. "Though 99 percent of the war concern is discounted, prices will still spike higher."

Bonds were helped as equities fell in Germany, the UK, France, Spain and Italy. The Dow Jones Stoxx 50 Index, which tracks Europe's 50 biggest companies by market value, fell 2.5 percent yesterday. Japan's Nikkei 225 Stock Average fell to a 20-year low.

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