European Debt Posts Second-Biggest Gain Since Sept. 11, 2001
By Gavin Finch
Aug. 18 (Bloomberg) -- European two-year notes posted their second-biggest weekly gain since Sept. 11, 2001, as credit market turmoil linked to losses on U.S. subprime mortgages spread.
Investors seeking the security of shorter-dated debt pushed two-year yields to the lowest in five months, and widened the spread, or yield gap, with 10-year bunds to near the most in a year. Bonds pared these gains after the Federal Reserve cut its discount rate to calm the market.
``There have been some massive moves into short-dated debt,'' said David Keeble, head of fixed-income strategy at Calyon in London. ``There's a lot of pain and uncertainty in the system.''
The yield on the two-year German note, which moves inversely to the price, fell 24 basis points this past week to 3.96 percent by 6:30 p.m. in London yesterday.
The price of the 4.5 percent security due June 2009 rose 0.41, or 4.1 euros per 1,000-euro ($1,350) face amount, to 100.91.
The yield on the benchmark 10-year bund, which is most sensitive to the outlook for inflation, fell 7 basis points on the week to 4.28 percent.
The spread between two- and 10-year bunds also widened as investors cut bets the European Central Bank will raise borrowing costs this year, interest-rate futures trading showed.
`Forward-Looking'
The ECB should abandon plans to lift rates in September, said Andrew Bosomworth, a fund manager in Munich at Pacific Investment Management Co., which oversees the world's biggest bond fund. ``A forward-looking central bank should go on hold,'' he said.
The implied yield on the December interest-rate futures contract has fallen 24 basis points this month to 4.26 percent yesterday.
The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB key rate since 1999.
European bonds fell yesterday as the Federal Reserve cut its discount rate to ease a global credit crunch, stoking speculation inflation will quicken in the euro region.
Bunds also dropped yesterday as stocks rose in Europe on anticipation the Fed's action will make it easier for companies, banks and hedge funds to obtain funding.
``The Fed is coming to the rescue,'' said Bob Maes, a fixed- income strategist in Brussels at KBC Bank NV. ``This is having a negative impact on bonds because the market is now worried that inflation will either remain high, or increase.''
The U.S. central bank reduced the rate at which it makes direct loans to banks by 0.5 percentage point to 5.75 percent. Policy makers kept the benchmark federal funds rate target unchanged at 5.25 percent.
http://www.bloomberg.com/apps/…d=ah2RxckIXvgI&refer=home
