Finance Markets

May 12, 2006

Bond yields up on inflation fears

Filed under: Bonds, Economy, US, Europe, UK, Japan

Government bond yields rose during the week as pushing back against inflationary pressures was a priority in a number of world economies.

In the US during the week fears of further interest rate hikes beyond the jump to 5 percent from the Federal Reserve on Wednesday were fueled by concerns about higher inflation. In consequence, yields on longer and shorter-dated bonds moved further apart. In morning trade on Friday, yields on two-year Treasury bonds were near 5 percent, a gain of 6 basis points during the week. Ten-year bonds added 8 basis points to around 5.18 percent, while thirty-year paper had added 10 basis points on the week to yield 5.29 percent.

In the UK, two-year gilts added 8.7 basis points to a yield of 4.810 percent and ten-year gilts yielded 4.739 percent, a gain of 5.1 basis points on the week.

Eurozone government bonds were helped by a strengthening euro and falling stock markets. Yields on the two-year Schatz in Germany added 2.1 basis points over the week to yield 3.409 percent, while the ten-year Bund yielded 4.071 percent, a gain of 7.2 basis points. Bond yields could rise even further with new bond sales scheduled in several European nations next week.

In Japan the two-year government bond was flat, yielding 0.795 percent, but the 10-year bond added 2.5 basis points to a yield of 1.985 percent in anticipation of a scheduled speech Monday by the Bank of Japan’s governor. Investors expect some guidance at that time as to the Bank’s intentions regarding interest rates.

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