(Updates to late trade)
By Ian Chua
LONDON, May 19 (Reuters) - Euro zone government bonds fell on Monday, extending last week's sharp decline as persistent worries about inflation and gains in stocks dulled the allure of safe-haven government debt.
A key forecasting gauge suggesting the weak U.S. economy has avoided a recession helped send stocks higher. The private Conference Board's Leading Economic Indicators index rose a better-than-expected 0.1 percent in April, after a matching increase in March, which was unrevised. See [ID:nN19531921]
"The very short-term view for the bond market is not supportive because market participants are more and more focused on inflation concerns rather than growth concerns," said Nathalie Fillet, senior interest rate strategist at BNP Paribas.
"And with equities continuing to edge higher ... we think Bunds could continue to go lower this week."
At 1521 GMT, June Bund futures <FGBLc1> were at 113.19, down 44 ticks from Friday's settlement close. But turnover was paltry with less than 650,000 lots traded.
The two-year Schatz yield <EU2YT=RR> gained 2.5 basis points to 4.025 percent, while the 10-year Bund yield <EU10YT=RR> advanced 5.3 basis points to 4.231 percent, nearing the 4-1/2 month peak of 4.272 percent set last Thursday.
These moves saw the two-10 year yield curve steepen slightly to 21 basis points from around 19 basis points late Friday.
Still, the curve remained near its flattest this year, well off levels above 80 basis points set in February when markets were expecting interest rate cuts by the European Central Bank.
Constant tough talk on fighting inflation from ECB officials has convinced investors that the central bank will not lower interest rates soon.
ECB President Jean-Claude Trichet reiterated on Monday that policymakers needed to make containing inflation their top priority, saying price stability was the best way to have a high level of sustainable economic growth.
Underscoring those worries, the Bundesbank warned in its monthly report that German inflation will probably accelerate markedly in coming months and is unlikely to slow significantly before late autumn due to high oil prices.
Analysts said minutes of the latest policy meetings from the Federal Reserve and Bank of England's Monetary Policy Committee (MPC) due this week could shed light on how central banks will balance the opposing influences of inflation and slower growth on their policy stance.
"They look set to shore up the more hawkish leaning of market expectations in recent weeks, especially the MPC minutes," said ICAP Europe Research analysts.
"However, with consumer spending and sentiment, and the housing market being relentlessly ground lower by the ongoing credit crunch, we are still a long way away from a situation where central banks feel the need to actually tighten policy."
Euribor interest rate futures <0#FEI:> fell as much as 5.5 basis points, pushing their implied yield higher still as the market priced in the slim possibility of a ECB rate hike.
The euro zone 2/10 swap spread curve remained inverted -- with 2-year rates higher than 10-year rates -- by around 7 basis points, the most since the introduction of the euro in 1999.
Also in focus this week are the German investor sentiment and business surveys as well as producer prices <G7/MAY>.
European stocks <.FTEU3> were up nearly 1 percent in late trade while the U.S. S&P 500 index <.SPX> added 0.8 percent. (Editing by Gerrard Raven) ((ian.chua@reuters.com; +44 207 542 1028; Reuters Messaging: ian.chua.reuters.com@reuters.net))
LONDON, May 19 (Reuters) - Bund futures pushed deeper into negative territory in afternoon trade on Monday as European and U.S. stocks extended gains after a key economic forecasting gauge suggested the U.S. economy has sidestepped a recession.
The private Conference Board said its Leading Economic Indicators index rose 0.1 percent, after a matching increase in March, which was unrevised. See [ID:nN19531921]
At 1415 GMT, June Bund futures <FGBLc1> had fallen 33 ticks to 113.30 on the day. The 10-year yield <EU10YT=RR> climbed 3.6 basis points to 4.214 percent, while the two-year yield <EU2YT=RR> added nearly 1 basis point to 4.001 percent. ((ian.chua@reuters.com; +44 207 542 1028; Reuters Messaging: ian.chua.reuters.com@reuters.net))
Keywords: MARKETS BONDS EURO
(Recasts with US data, strategists' comments, background)
By Emelia Sithole-Matarise
LONDON, May 16 (Reuters) - Euro zone government bonds rallied on Friday after a key U.S. consumer sentiment index tumbled to its lowest in 28 years, reigniting fears weak consumer spending may erode growth, boosting bids for quality fixed income.
Bunds gained despite competition from European stocks for investors' cash as buyers picked up paper at cheaper levels after a three-day sell-off, pushing two-year yields back below the psychologically key 4.00 percent level.
Sentiment was further bolstered after the Reuters/University of Michigan Survey of Consumers said its preliminary index of confidence fell to 59.5 in May, its lowest since June 1980. In April it was 62.6 and economists' median forecasts in a Reuters poll were for a May reading of 62.0.
This helped offset data showing a surprisingly strong rise in U.S. housing starts in April, which had eroded gains in government debt markets earlier in the session.
"The market turned around triggered apparently by the Michigan sentiment figure but I think most likely it's stopping the trend of the last couple of days," said Kornelius Purps, fixed income strategist at UniCredit.
"We had an extremely bearish week which is behind us and the tide is turning a little bit to close out the week," he said.
At 1640 GMT, June Bund futures <FGBLM8> were 43 ticks up at 113.61.
Two-year bond yields <EU2YT=RR> dipped back below 4.0 percent and were last at 3.988 percent, while 10-year yields <EU10YT=RR> were 3.2 basis points lower at 4.174 percent, flattening the yield curve.
Bunds had sold off this week as concerns over rising inflation, particularly in the UK, caused markets to scale back rate cut expectations, while a larger-than-expected increase in German first quarter GDP accelerated the slide on Thursday.
However, signs of softness in U.S. manufacturing and the job market reminded investors the economy there remained weak, giving a boost to Treasuries overnight which in turn pulled Bunds higher early in Friday's session.
"We remain of the belief that the lows for the market in the near term have already been seen and the building blocks are in place for a move higher," said Sean Maloney, a strategist at Nomura in London.
"This may take some time to gain traction however, with sensitivity to the central bank talk we have been seeing still high after the latest inflation run."
Purps at UniCredit however said the bearish trend in fixed income markets was likely to resume as the earnings season draws to a closer without any hard knocks for stock markets and as investor attention turns to a stream of euro zone data due next week, key among them Germany's Ifo business sentiment index.
"There is a risk of further yield increases in the euro area. Certainly the IFO index is key, whether we'll see an increase or another big drop, both are possible and might have a remarkable impact on ECB expectations and the direction of the curve," Purps said.
Euribor rate futures <0#FEI:> showed some signs of stabilising across the 2009 strip, which was the hardest hit by recent selling as investors pushed out rate cut expectations with some even seeing an outside risk of the ECB hiking interest rates this year in the face of rising global pricing pressures.
The central bank faces a tough task as inflation in the single currency bloc is only just below March's 3.6 percent, while growth is expected to slow in response to credit market turmoil, U.S. weakness, high oil and commodity prices and a strong euro.
ECB President Jean-Claude Trichet said on Friday a surplus of capital chasing too few investment opportunities in past years was now partly to blame for the record oil and commodity prices bedevilling the ECB's efforts to control inflation.
His colleague, Governing Council member Axel Weber said in a newspaper interview released late on Thursday that raising interest rates remains an option for the bank. He said updated ECB staff economic projections, to be released at the June rate meeting, would provide a good basis to discuss medium-term interest rate options. [ID:nL15738852].
In the swaps market, the 2/10 year swap curve remained inverted with 2-year swap rates <EURAB6E2Y=> at 4.66 percent and 10-year rates <EURAB6E10Y=> at 4.605 percent. (Editing by David Christian-Edwards)
((Reuters Messaging: emelia.sithole.reuters.com@reuters.net, Email: emelia.sithole@reuters.com; +44 20 7542 6752))
Keywords: MARKETS BONDS EURO
--------------MARKET SNAPSHOT AT 1547 GMT ------------------
Futures continuous contract basis
FUTURES CASH YIELD
THREE MONTH EURO 95.175 (+0.025) 3.955 (-0.018)
TWO-YEAR SCHATZ 103.43 (+0.05) 3.982 (-0.022)
10-YEAR BUND 113.62 (+0.44) 4.174 (-0.032)
30-YEAR BUND 4.655 (-0.032)
Current levels versus prior European close
-----------------------------------------------------------
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LONDON, May 16 (Reuters) - Euro zone government bond futures extended gains on Friday after a report showing that U.S. consumer confidence tumbled to its lowest in 28 years in May.
The Reuters/University of Michigan Survey of Consumers said its preliminary index of confidence fell to 59.5 in May, its lowest since June 1980. In April it was 62.6 and economists' median forecasts in a Reuters poll were for a May reading of 62.0.
The June Bund future <FGBLM8> rose to 113.50 from 113.40 before release of the data. Two-year yields were little changed at 4.005 percent <EU2YT=RR>.
(Reporting by Emelia Sithole-Matarise) ((Reuters Messaging: emelia.sithole.reuters.com@reuters.net, Email: emelia.sithole@reuters.com; +44 20 7542 6752))
Keywords: MARKETS BONDS EURO
LONDON, May 16 (Reuters) - Euro zone government bond futures pared gains on Friday after a surprisingly strong rise in U.S. housing starts in April hinted that the U.S. housing market slowdown may not be as severe as previously thought.
U.S. housing starts in April ran at a 1.032 million-unit annual rate, up from a revised 954,000-unit rate in March, while permits rose 4.9 percent to 978,000 a year from a revised 932,000 in March. Economists surveyed by Reuters had forecast April starts at a 940,000-unit rate and permits at 920,000 a year.
June Bund futures <FGBLM8> briefly fell to a session low of 113.14 from 113.30 before release of the data. They then recovered to 113.31.
(Reporting by Emelia Sithole-Matarise) ((Reuters Messaging: emelia.sithole.reuters.com@reuters.net, Email: emelia.sithole@reuters.com; +44 20 7542 6752))
Keywords: MARKETS BONDS EURO
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