Bonds: UK yields climb as stimulus hopes increase

LONDON (ShareCast) - Yields and basis point (bp) movements of some of the most-watched 10-year bonds this afternoon:

US: 2.03% (no change)
UK: 2.21% (4bp)
Germany: 1.66% (5bp)
France: 2.29% (2bp)
Spain: 5.17% (-4bp)
Italy: 4.39% (no change)

[NOTE: there are 100bp to a percentage point]

US bond yields were flat at 2.03% on Wednesday, one day after President Barack Obama began marshalling the powers of his position to try and shame the opposition party, the Republicans, into accepting a compromise on a dramatic series of fiscal cuts that are just days away.

Yields were however supported by generally positive economic data released from several key government departments. A spike in vegetable prices underpinned a rise in wholesale costs in January as the producer price index rose a seasonally adjusted 0.2% last month. The US Commerce Department reported that permits for house building hit highs in January. Permits for future home building issued in January rose to a 4.5-year high. However housing starts dropped 8.5% in January to a 890,000-unit annual rate, pulled down by a sharp drop in the volatile, multi-family unit category. Starts for single family units hit their highest level since July 2008.

In the UK, bond yields rose by four basis points to 2.21% as minutes of the Bank of England's (BoE) latest policy meeting showed a more dovish tone. While members of the central bank's monetary policy committee voted to leave the existing quantitative easing (QE) measures unchanged, a greater number of policy-makers - including BoE Governor Mervyn King - voted to increase QE, causing the pound to slump to a 15-month low against the euro. Meanwhile, data published by the Office of National Statistics showed that UK jobless claims fell more than was forecast. Unemployment claims fell 12,500 from December to 1.54m. In the quarter to the end of December, unemployment - as measured by the International Labour Organisation methods - dropped 14,000 to 2.5m.

In Europe's largest economy, Germany, bond yields grew by five basis points to 1.66%. The Consumer Price Index was recorded at 1.8% year-on-year in the federal state of Bavaria and €4.04bn of 2023 bunds were sold with a bid-to-cover ratio of 1.2.

In France, yields jumped two basis points to 2.29% after French Foreign Minister Laurent Fabius said the French government would likely reduce its economic growth forecast for the year to around 0.2% and 0.3% from a current 0.8%, as economic activity in the country would suffer from a slowdown in the European Union. "We had an original forecast of 1.2% growth then it was revised to 0.8% and now, since the things in Europe don't seem to be encouraging we will be forced to revise downward," the minister was cited by NASDAQ as saying to French radio station RTL. The lower expected growth in 2013 means the government is likely to find it more difficult to meet its commitment to reduce its deficit to the equivalent of 3.0% of gross domestic product (GDP).

Spanish yields contracted by four basis points to 5.17% as Prime Minister Mariano Rajoy pledged to pull Spain out of its painful recession without relaxing his drive to cut the country's high public deficit. In a public speech, he said that the deficit had dropped below 7.0% of GDP last year.

There was no change in Italian bond yields, which stood at 4.39% when the market closed, as the country edged close to its parliamentary elections this weekend. Analysts and political pundits have been divided over the likely alliances and arrangement of the next government. Since polls officially closed on February 8th, experts have been unable to predict a likely outcome with a large portion of voters in the Eurozone's third largest economy believed to still be undecided. A report prepared by the International Monetary Fund indicated that if the country were to implement a series of reforms it laid out, 5.7% could be added to the country's GDP over five years and 10.5% over ten years.

MF