LONDON, Dec 7: Yields on interest rate sensitive two-year European government bonds fell sharply on Friday while three-month money market Euribor futures rallied on weaker-than-expected US non-farm payrolls data.
The jobs data dented optimism, triggered by a US services sector survey on Wednesday, that the world’s largest economy may be set for a swift recovery. The jobs data helped yields reverse some of the steep rises seen in the last two sessions.
We have been anticpating a rate cut anyway, so this data confirms a 25 basis point cut next week, said Alan Wilde, director of fixed income at Abbey National Asset Managers in Glasgow.
Rates could come down further in the first quarter of 2002. There is no evidence that the Federal Reserve has done enough to cut interest rates and stimulate the economy.
The two-year Schatz note yield was down 1.8 basis points at 3.665 per cent, down from 3.725 per cent just before the data and down from Thursday’s intraday high of 3.833 per cent which was its highest since September 11.
The 10-year Bund yield was down 0.3 basis points at 4.756 per cent and off Thursday’s two-month highs.
The Bund future however pared gains seen after the US data as it continued to struggle to regain composure after steep selling since Wednesday.
The March Bund future was up 0.05 at 108.64. The March Euribor future was up 0.030 at 96.840.
Since September 11, the market moves in waves, said Charles Berry, trader at LBBW.
The Labour Department said 331,000 jobs were lost in November, more than the 189,000 that Wall Street economists had anticipated. The unemployment rate climbed to 5.7 per cent in November - its highest rate of unemployment since August 1995.
A Reuters poll of 24 primary dealers in US government securities showed all but one expected the Federal Open Market Committee to cut the federal funds rate by a quarter point to 1.75 per cent at its meeting next Tuesday.
Short dated yields in Europe had started to come off Thursday’s highs earlier on Friday after weak German October industry output data and falling stocks helped put a brake on further sell-offs.
On Thursday, yields extended Wednesday’s rise, to hit levels not seen since September after the European Central Bank decided to meet market expectations to leave interest rates unchanged.
But there was still a sense of disappointment with the decision given that euro zone inflation has been falling and economy remains weak.
This was highlighted in data on Friday, when industrial production in the euro zone’s largest economy, Germany, fell by a greater-than-expected 2.1 per cent month-on-month in October, while consumer prices fell 1.7 per cent year on year in November.
Late on Thursday, the Chairman of European Union finance ministers, Didier Reynders, said the ECB’s decision to leave rates unchanged on Thursday was unsurprising and that easing was an issue for 2002.
However, ECB board member Eugenio Domingo Solans on Friday said in a television interview on Friday, said euro zone inflation is still high enough for the ECB to stick to its cautious monetary policy.
Bunds underperformed T-notes after the data with the 10-year yield spread narrowing five basis point to 24. The 10-year euro swap spread was steady at 27 basis points.—Reuters