European bonds may fall in coming days, pushing 10-year yields to seven-month highs, amid expectations accelerating inflation may prevent the European Central Bank from cutting interest rates in coming weeks.
"If the ECB cuts it will be a surprise -- a bad surprise," said Roger Schneider, who helps oversee about 4 billion euros (US$3.5 billion) as head of fixed-income investments at BFG Investment-Fonds in Frankfurt. Inflation is too strong for the central bank to be able to justify a cut, he said.
The yield on the benchmark 10-year German bund was little changed at 5.07 percent in the past week, 13 basis points lower than the Nov. 10 six-month high. Yields on German two-year notes rose 1 basis point to 4.33 percent in the week, while June bund futures fell 0.09 to 106.53. Bonds were little changed on Friday.
Consumer price reports from France, Denmark and Spain in the coming week may give investors further clues on inflation in the 12-nation euro region. Consumer prices in France probably rose 2.1 percent in the year to May, compared with 2 percent previously, according to economists in a Bloomberg News survey. The report is due on Tuesday.
Inflation in Germany, Europe's largest economy, rose 3.6 percent in the year to May, compared to 2.9 percent in the year to April. That's the fastest pace for at least five years. Euro region inflation expanded at an annual 2.9 percent in April, compared with 2.6 percent in March.
The ECB's goal is to keep inflation below 2 percent, a target it has missed since June 2000. President Wim Duisenberg said on Thursday he doesn't expect inflation to drop below the target until early next year.
Also on Thursday, the European Central Bank left interest rates on hold at 4.5 percent, as anticipated by economists. Unlike the US Federal Reserve -- which also has a mandate to boost employment -- the ECB's mandate is to maintain price stability, rather than boost growth.
Weaker demand from the US, the world's largest economy, is denting business in Europe, analysts said. The US economy grew 1.3 percent in the first quarter, the second slowest rate in more than five years. European export growth dropped to 0.1 percent in the first quarter from 3 percent in the fourth.
The euro-region economy grew 0.5 percent in the first quarter, hampered by a 0.9 percent drop in capital spending, and expanded 2.5 percent from a year earlier. Fourth-quarter growth was revised to 0.6 percent from 0.7 percent.
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