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September 1, 2006    

Global bond yields drop over week

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by Elaine Frei

Bond prices rose and yields fell to their lowest levels in several months this week on slower economic growth worldwide as well as on lower rates of inflation.

Trade in US Treasury bonds was light as a number of new economic reports were issued during the week. A turning point was the release of the minutes of the Federal Reserve’s most recent meeting, which indicated that while more internet rate hikes might be in store they are by no means certain. The current feeling among most analysts is that there is only a 10 percent chance that US interest rates will go up this month. In addition, August’s unemployment figures were close to expectations as 128,000 jobs were created. Average hourly earnings were only up by 0.1 percent, however, another indication that another rate hike might not be necessary.

The ten-year US Treasury bond yielded 4.73 percent on Friday, down by over 5 basis points during the week.

In the UK, ten-year gilts were also down by around 5 basis points to a yield of 4.495 percent, and have fallen by 26.5 basis points since the middle of August. Among the data affecting gilt prices were house prices that are 6.5 percent higher over the year so far, mortgage lending at a 6-month high, and retail sales up at the fastest pace in a year and a half.

In the Eurozone, the ten-year Bund also lost about 5 basis points during the week to a yield of 3.739 percent as most analysts expect that the European Central Bank will raise interest rates again before the year is out.

Meanwhile, in Japan, ten-year government bonds were yielding 1.645 percent, a decline of 4.4 basis points.

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