German Two-Year Notes Drop as Trichet Says ECB May Boost Interest Rates
German 2-year notes fell for a second week, pushing the yield to the highest level in more than two years, after European Central Bank President Jean-Claude Trichet said interest rates may be raised in April.
The extra yield investors demand to hold 10-year notes over 2-year debt decreased to 1.51 percentage points, the narrowest since the week ended Nov. 12. Greek bonds fell on concern higher borrowing costs may hamper the region’s most-indebted countries.
The ECB’s “unexpectedly hawkish stance is taking its toll on the short end of the German yield curve,” said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets Ltd., a broker for banks and investors. “The ECB is clearly laying the groundwork for an imminent rate hike, most probably in April.”
The German two-year yield rose 22 basis points, or 0.22 percentage point, to 1.76 percent at 5 p.m. in London yesterday. That’s the biggest increase since the week ended Jan. 14. The yield on the 10-year bund, the euro region’s benchmark government security, gained 12 basis points to 3.27 percent.
German government bonds have lost investors 2.3 percent this year through March 3, compared with a 0.7 percent loss for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek has debt returned 1.7 percent over the same period.
Gain in Oil
Rising oil prices, which surged above $100 a barrel in New York this week, and faster economic growth are fanning inflation, which has breached the ECB’s 2 percent limit for three straight months.
Consumer prices in the 17-nation euro region increased at an annual 2.4 percent pace in February, up from 2.3 percent a month earlier.
“Strong vigilance is warranted,” said Trichet, adding that any increase in the target lending rate wouldn’t necessarily be the start of a “series” of moves.
Euribor futures fell, pushing the implied yield on the contract expiring in December 2011 up 23 basis points this week to 2.17 percent as traders added to bets that the ECB will boost borrowing costs. It was 1.33 percent at the end of 2010.
Forward contracts on the euro overnight index average, or Eonia, signal investors think the ECB will increase the main refinancing rate by 25 basis points by its July meeting, Deutsche Bank AG data shows.
Rate Increase Outlook
“The ECB clearly signaled that a 25 basis point rate hike is in the pipeline for next month’s meeting,” analysts at Royal Bank of Canada, including Peter Schaffrik in London, wrote in an e-mailed report dated March 3. “Thereafter, the outlook is less clear, but we expect the Governing Council to move at a pace of 25 basis points per quarter, taking the refi rate to 1.75 percent by the end of 2011.”
Ten-year bund yields are expected “to stay between 3 percent and 3.5 percent, but a break-out to the upside is likely toward the end of 2011,” the analysts wrote.
Bonds from the region’s most-indebted nations dropped, with the Greek 10-year yield rising 37 basis points to 12.25 percent. Since the end of January, Greece’s 10-year bonds have risen on 6 trading days, falling on 18. They decreased for the seventh straight day yesterday, pushing the yield as high as 12.29 percent, the most since Jan. 11.
Greece’s two-year yields reached the highest since May 10, the first trading day after the European Union and the International Monetary Fund announced the creation of a bailout fund to backstop the euro. The yields surged 125 basis points, or 1.25 percentage points, in the week to 15.45 percent. That’s the biggest increase since the week ended Jan. 28.
To contact the reporters on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
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