European two-year notes posted their biggest drop in eight days yesterday as rising equities and better-than-expected US retail sales and consumer confidence figures damped demand for fixed-income investments.
Retail sales in the world's biggest economy last month recorded their biggest gain since October 2001, while consumer confidence rebounded in April from the month before, when it fell to its lowest since August 1993. Speculation the war in Iraq will soon be over also reduced the appeal of European government debt and other securities that pay fixed returns.
The German 2 1/2 percent note due in March 2005 shed 0.16, or 1.6 euros per 1,000-euro (US$1,071) face amount, to 99.93 yesterday.
The yield rose 9 basis points to 2.53 percent, the biggest one-day increase since April 2. In the week, the note shed 0.10, or 1 euro per 1,000-euro face amount, with the yield rising 5 basis points.
A basis point is 0.01 percentage point.
With the growing prospect of an end to the war in Iraq, "the link between the equity market and bonds is moving government debt," said Ronald Balk, who helps oversee US$26 billion at Robeco Groep in Rotterdam. He favors European bonds over US Treasuries, betting the recovery in the world's biggest economy will be faster than in Europe in coming months.
The Dow Jones Stoxx 50 added 0.50 percent in the week, paring its decline this year to 5.6 percent. Germany's DAX Index rose 3 percent on the week. The 10-year bund yield and the Stoxx 50 typically move in the same direction, showing a statistical correlation of 0.82 in the past three months. The closer to 1, the tighter the link.
Three weeks after entering Iraq to topple Saddam Hussein's regime and remove any banned weapons, US and UK forces have control of every major Iraqi city except Hussein's family stronghold of Tikrit, where air strikes are underway. Mosul, Iraq's third-largest, fell to Kurdish and US units yesterday after the northern oil center of Kirkuk was captured Thursday.
The German 4 1/2 percent bund maturing in January 2013 fell 0.17, or 1.7 euros per 1,000-euro face amount, to 102.31 in the week. The yield added 2 basis points to 4.20 percent. On Friday, the bund fell 0.50, or 5 euros per 1,000-euro face amount. The yield added 6 basis points.
"We still see the chance for weaker government bonds," said Kornelius Purps, a bond analyst at HVB Group in Munich. Because coalition forces probably will be successful in Iraq, "one main reason for parking funds at the front end of the government curve seems to be void."
Expectations for an interest-rate reduction from the European Central Bank in coming weeks eased after the bank said in its monthly report yesterday that current rates are "favorable to economic growth."
The rate on the May interest-rate futures contract rose 8 basis points to 2.44 percent in the week.
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