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EURO GOVT-Bonds rise after Trichet comments

Thu, Oct 2 2008, 14:46 GMT
http://www.afxnews.com

LONDON, Oct 2 (Reuters) - Euro zone government bonds rose on Thursday after European Central Bank President Jean-Claude Trichet made comments on inflation risk, which analysts recognised as conciliatory language.

Speaking at a Frankfurt news conference after the euro zone's central bank left interest rates steady at 4.25 percent, Trichet said inflation risks had diminished. See [ID:nECBNEWS].

"These are the comments which the market has jumped upon in what is clearly more conciliatory language from the ECB President to what we have become used," said Sean Maloney, a bond analyst at Nomura in London.

"However, the remarks stop short of flagging an imminent rate cut with a deal of time still spent on emphasising the case for price stability as an important concern for restoring confidence," he added.

At 1405 GMT, the December Bund future was up 15 ticks on the day at 115.52. The contract hit a session high at 115.70 after Trichet's comments.

The interest rate-sensitive two-year Schatz was down 9.3 basis points at 3.333 percent, after hitting a 6-1/2 month low of 3.263 percent.

The 10-year yield fell 3.4 bps to 3.965 percent.

The 2-10-year debt yield curve steepened on raised expectations for a euro zone rate cut and briefly hit 69 basis points - its widest in more than six months.

The December Euribor futures contract, a gauge of short-term euro zone interest rate expectations, pushed up by 12.5 basis points to 95.185 - a session high and at its highest since May 23.

The two-year swap rate also fell, and was last 15.7 basis points lower at 4.437 percent.

Figures derived from Eonia rates show the market increases its expectations for a ECB rate cut into year-end while a second cut is fully priced in by March.

Spot break-even rates -- the difference between yields on inflation-protected bonds and conventional bonds and a gauge of inflation expectations -- fell to new multi-year lows on Thursday after a batch of weak economic surveys this week.

The break-even rate for the French index-linked OATei was last 1.66 percent, around 10 ticks lower on the day.

Bunds started the session on the back foot, as bourses gained on news that the U.S. Senate approved a $700 billion banking sector bailout plan late on Wednesday and took the government one step closer to rescuing the U.S. economy from the credit crisis.

BAILOUT, TRICHET

The bailout plan will now go to the House of Representatives, probably on Friday, to see if lawmakers will pass a modified bill which financial leaders have said is crucial to avert economic catastrophe [nHKG368564].

Market participants said that even if the bill is eventually passed, it was unclear whether its measures would be successful in freeing up credit markets, which many say is vital in avoiding an economic downturn in the U.S. and around the world.

(Editing by Andy Bruce) Keywords: MARKETS BONDS EURO

tf.TFN-Europe_newsdesk@thomsonreuters.com

cmr

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