Stock blues help bonds

LONDON – Sharp falls in global stock markets and a rallying euro gave battered eurozone government bond prices some respite yesterday, tugging 10-year yields back from 20-month highs. Bond prices in the eurozone, Japan and the United States have fallen virtually non-stop since mid-January as signs of strong global growth have fueled worries about higher interest rates and inflation – the two worst enemies for government debt investors. Benchmark Bund futures hit fresh contract lows in early trade. But just as the technical backdrop appeared to darken further, a red-hot euro and tumbling stock market came to the rescue. «There seems to be a flight to safety going on at the moment. There’s a great deal of uncertainty about the outlook of interest rates and currencies, both of which are hitting equities and providing a boon for bonds,» said Richard McGuire at RBC Capital Markets. The FTSEurofirst 300 index of leading shares fell more than 1.9 percent to its lowest level in nearly a month, encouraging investors back into the traditional safe-harbor of government bonds. The strength of the euro also bolstered the relative appeal of eurozone debt as investors bet the growth-dampening effect of a stronger currency would deter the European Central Bank from raising interest rates aggressively. After rising to 4.1 percent in early trade – their highest level since September 2004 – benchmark 10-year Bund yields eased back to 4.07 percent to stand little changed on the day. With growth indicators still pointing to a strong upturn in the eurozone and robust global growth, some analysts said further losses were to come. «The stronger euro is giving some relative support to eurozone government bonds, as are weaker stocks, but the fundamental skew still remains towards weaker bonds in the near term,» said David Brown, strategist at Bear Stearns. ECB policy makers continued to provide markets with hawkish soundbites. Inflation warning ECB Executive Board member Jose Manuel Gonzalez-Paramo warned inflation was likely to remain above the ECB’s target of 2.0 percent in the near term, and that inflation risks in the eurozone were notably on the upside. Asked about the prospect of increasing rates from 2.5 percent to 3 percent in June, he stressed that all options were open. On the data front, German annual inflation quickened for the first time in seven months in April, boosted by high energy costs, and a senior economic adviser to the government said the risks of high oil prices were being understated. In a choppy session, Bund futures shuttled in and out of positive territory. The June Bund future fell to a contract low of 114.55 early in the session but rebounded into positive territory as the euro powered to new one-year peaks above $1.2950 and was little changed at 114.80 in late European trade. The spread between 10-year US and German bond yields widened slightly to 118 basis points, as eurozone debt outperformed.