Euro Watch

The notes of European government recorded the greatest drop in four years as traders were concerned about speeding inflation rates in the region which will affect the policy makers of central bank in their scope for cutting rates on interest. The impact was mostly felt in the two year government notes because they are most vulnerable to rate changes. The two year government notes dropped lowest for a second consecutive week owing to investors backed up citing that the ECB will decrease its main rate which earlier stood for a six year high. According to the reports for the week the rate of inflation especially in countries like France and Germany accelerated at a faster rate which was more than economists had estimated.

The increase in the prices of food and energy was the main reason for the accelerating inflation in these countries the report also stated. Chief of investment grade debt strategy at ING Bank NV in Amsterdam Padhraic Garvey said that the figures of inflation led investors to back up their bets wagered on interest rate cuts. The chief also added that this drop does not affect his views on the bigger picture and he also said that he expected the current year to be a sluggish environment for growth and returns will further begin to drop from its current standing. The return on the two year note increased by 23 basis points and stood at 3.34% which was the highest position for it since April 2004. The value of the 4% security which will mature in 2009 also dropped to 0.40 that is 4 euros per 1,000-euro or $1,484 face amount, to 101.12 and stood at 101.12. According to Garvey’s estimate the return on the notes will decline to 3% by month of June in the current year. Returns progress opposite to bond prices.

Germany is Europe’s biggest economy where as per a government report, annual producer prices increased by 3.3% which was the fastest rise in thirteen months. Consumer prices in France shot by an annual 3.2% which was a rise from its earlier 2.8% in December according to the national statistics bureau Insee and this data is calculated on EU harmonized system. This rise is the fastest since the year 1996. The return on the ten year Bund of Germany, which is considered as the standard for Europe gained by four basis points and stood at 4%. The longer dated bonds generally give higher yields as against the shorter dated bonds and this is when the traders calculate that the central banks will maintain their higher rates to tame inflation.

ECB’s borrowing costs dropped when the expected returns on the Euribor futures contract for June rose to 18 basis points and stood at 4.09% in last week. The inflation prospects increased as calculated by the return difference between nominal and index-linked bonds. The breakeven rate for the ten year inflation protected notes of France, which is also the standard for Europe gained by as much as 2.22% which is the record gain since last month.

Tags: European Economy News // Add Comment »