Interest rate worries send bond yields lower

Yields on government bonds were up in the US, the UK and in the Eurozone on Tuesday, while yields on Japanese government bonds fell on the day after an auction of two-year bonds.

The yield on two-year Japanese government bonds dropped 6 basis points to 0.780 percent, while ten-year bonds were down by 2.5 basis points to a yield of 1.835 percent. Besides the new auction, the bond prices also were helped out by new data showing that industrial output had grown less than had been expected. This eased worries that Japanese interest rates will rise soon.

Bonds in the Eurozone saw yields fall as investors worried that an increase in the money supply would push the European Central Bank to raise interest rates when they meet next week. The money supply grew at a rate of 8.8 percent in April, up from 8.5 percent in March. Also adding to forces holding bond prices down in the region was a comment from an ECB official that rising energy costs are sending core inflation up. Late in the day, yields on the two-year Schatz were at 3.313 percent, a rise of 4.3 basis points, while the ten-year Bund had added 4.7 basis points to a yield of 3.935 percent.

Yields on UK gilts followed the Eurozone yields up. Ten-year gilts were up 2.4 basis points to a yield of 2.4 percent and two-year gilts yielded 4.680 percent, a rise of 1.1 basis points. In addition, it was announced by the Debt Management Office that it will auction £2.75 billion worth of 40-year gilts next week.

Meanwhile, in the US, concerns about future rises in the interest rate caused Treasury bond yields to rise. The new concern was spurred by comments by the president of the Chicago Federal Reserve that inflation is now at the upper end of the range at which the economy remains stable. However, bond yields did not rise as much as they could have as the equities markets saw significant declines, which tends to send investor money into bonds. Yields on two-year Treasury bonds were 2.1 basis points higher to 4.975 percent, while ten-year issues had added 3.4 basis points to a yield of 5.086 percent.

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