By George Matlock
LONDON, May 15 (Reuters) - Interest rate-sensitive two-year euro zone government bond yields remained at their highest level since late 2007 on Thursday, with investors preoccupied by stronger than expected German economic growth.
There was some bond-friendly data from the United States, although this appeared to have more of an impact on Bund futures than cash issues.
The New York Fed's manufacturing survey business conditions index tumbled to minus 3.23 in May from positive 0.63 in April compared with a forecast for unchanged.
U.S. initial weekly jobless claims were slightly higher than forecast, and later U.S. industrial output was reported to have declined by more than expected.
"With all this bond-friendly U.S. data, by the time we got to the Philadelphia Fed business survey, which declined by less than expected, no one really cared to know. Bond (futures) had decided to hang in there with pared losses," said a trader in London.
At 1510 GMT, two-year yields <EU2YT=RR> were 10.2 basis points higher at 4.01 percent. Earlier, the yield marked 4.051 percent, its highest level since December 28.
The 10-year Bund yield <EU10YT=RR> was up 5.6 basis points at 4.227 percent, as the yield curve flattened.
Bond yields move inversely to bond prices.
June Bund futures <FGBLc1> were 55 ticks lower at 113.17, having fallen as low as 112.81 during the session. But earlier in the session they too had marked their lowest levels since Dec. 28 in the wake of the German data and as technical factors contributed to the declines.
Bund prices were pushed deeply south by German data showing German GDP expanded by a larger-than-expected 1.5 percent quarter-on-quarter in the first three months of 2008, while the euro zone flash estimate of first quarter GDP was also a higher-than-expected 2.2 percent.
"Strong German first quarter GDP data was the dominant focus this morning. The breakdown is not available for some time, but the concern about a 1.5 percent gain on the quarter when the underlying news was deteriorating is that it is probably substantially due to seasonal distortions," said Andy Chaytor, a bond analyst at RBS in London.
Late in the session, ECB Executive Board member Lorenzo Bini Smaghi kept up the central bank's anti-inflation rhetoric as he said no one should doubt the bank's primary focus must be inflation.
In supply, France sold 4.59 billion euros of BTAN paper in an auction which analysts said was slightly disappointing. More on [ID:nL15510970]. (Editing by Gerrard Raven) ((Reporting by George Matlock; george.matlock@reuters.com; Reuters Messaging: george.matlock.reuters.com@reuters.net; +44 20 7542 2508))
Keywords: MARKETS BONDS EURO
--------------MARKET SNAPSHOT AT 1527 GMT------------------
Futures continuous contract basis
FUTURES CASH YIELD
3-MONTH EURIBOR 95.165 (unch) 3.975 (-0.008)
2-YEAR SCHATZ 103.41 (-0.15) 3.992 (+0.084)
10-YEAR BUND 113.30 (-0.42) 4.214 (+0.043)
30-YEAR BUND 88.64 -0.5 4.707 (+0.032)
Current levels versus prior European close
10-YEAR EURO SWAP SPREAD 42
-----------------------------------------------------------
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LONDON, May 15 (Reuters) - Sterling slipped on Thursday, staying trapped near three-month lows hit the previous day against the dollar as the currency was pressured by the prospect that higher UK inflation risks would strangle economic growth.
The Bank of England's quarterly inflation report made bearish reading on Wednesday, highlighting the tangle faced by policymakers trying to balance rising inflationary pressures from sky-high commodity prices and economic damage from the ongoing global credit crunch.
The report hacked away at expectations for UK interest rates to be cut in June from the current 5 percent, and left the pound severely pressured as investors worried about future damage to the economy from the inflation versus slowing growth conflict.
UK Prime Minister Gordon Brown weighed into the rate debate earlier, saying he hoped that the BoE would be able to cut rates further. This had intially boosted sterling, but ultimately did little to quell investors' concerns about the toxic coupling of high inflation and low growth.
"(Higher prices) leaves the BoE very little room to move on monetary easing, and in that respect, it's possible for economic growth to slow quite sharply going foreward," said Lee Hardman, currency economist at BTM UFJ.
"The market has come to the view that higher inflation is contributing to further exacerbating the downside risks in economic growth," he said adding that this problem would keep sterling weak.
By 1406 GMT, sterling was down 0.15 percent at $1.9433, having hit a three-month low on Wednesday at $1.9363 <GBP=>. The euro rose 0.2 percent to 79.62 pence <EURGBP=>.
BoE Governor Mervyn King said on Wednesday the fall in sterling will support the rebalancing of the economy, while the inflation report itself attributed some of the weakness in the currency in recent months to "a reassessment by investors of the sustainable value of sterling or an increase in the risk premium required for holding sterling assets".
A poll carried out after the BoE report showed it would hold off from growth-boosting rate cuts until the third quarter as it battles soaring inflation [BOE/INT]. (Reporting by Naomi Tajitsu and Veronica Brown; Editing by David Christian-Edwards) ((RM:veronica.brown.reuters.com@reuters.net; Tel: +44 207 542 6745))
Keywords: MARKETS STERLING CLOSE
LONDON, May 15 (Reuters) - Euro zone government bond futures pared losses on Thursday after the release of weaker than expected U.S. industrial output data.
U.S. industrial output fell by 0.7 percent in April month-on-month and compared with a Reuters poll forecast for a 0.3 percent decline. The March data was also revised to a smaller gain than previously recorded.
The data followed a weaker than expected New York Fed manufacturing survey and slightly higher than forecast weekly jobless claims.
At 1322 GMT, the June Bund future <FGBLc1> was down 42 ticks on the day at 113.30, compared with 113.21 before the output data.
The interest rate-sensitive two-year Schatz yield <EU2YT=RR> was up 4.3 basis points at 3.95 percent, compared with 3.975 percent earlier. ((Reporting by George Matlock; george.matlock@reuters.com; Reuters Messaging: george.matlock.reuters.com@reuters.net; +44 20 7542 2508))
Keywords: MARKETS BONDS EURO
LONDON, May 15 (Reuters) - Euro zone government bond futures pared losses on Thursday after the release of a weaker than expected U.S. manufacturing survey and higher than forecast weekly jobless claims.
The New York Fed's manufacturing survey, known as the Empire State report, recorded a fall of 3.23 in May, compared with a forecast for unchanged. In April, the survey was positive at 0.63.
U.S. weekly initial jobless claims for state aid were 371,000 compared with a Reuters poll forecast of 370,000.
Although the data suggested economic slowdown, Empire State data came with the highest prices paid index reading since the survey began in 2001, suggesting raised inflationary risks. Table [ID:nNAT004033].
At 1238 GMT, the June Bund future <FGBLc1> was down 50 ticks on the day at 113.22, compared with 113.11 ahead of the data.
The interest rate-sensitive two-year Schatz yield was up 6.6 basis points at 3.975 percent, considerably less than around 10 basis points higher earlier in the session.
U.S. Treasuries turned positive after the data.
Before the data, investors expected a 92 percent chance that U.S. interest rates would remain unchanged at 2.0 percent at the next Federal Reserve rate-setting meeting on June 25 <FEDWATCH>.
After the data, the expectations for unchanged rates fell to 88 percent and chances of a 25 basis points cut to 1.75 percent rose to 12 percent from eight percent earlier. ((Reporting by George Matlock; george.matlock@reuters.com; Reuters Messaging: george.matlock.reuters.com@reuters.net; +44 20 7542 2508))
Keywords: MARKETS BONDS EURO
LONDON, May 15 (Reuters) - The euro wiped earlier gains versus the dollar on Thursday after European Central Bank President Jean-Claude Trichet warned that second-quarter growth in the single currency zone would be "less flattering."
By 1138 GMT, the euro had erased earlier gains made after robust first quarter German and euro zone GDP data to trade flat on the day at $1.5479 <EUR=>.
"Despite the strong German data, the overall outlook for euro zone growth in the coming quarters suggests a slower period," said David Page, economist at Investec.
"It's also a reminder of the some of the downside risks to inflation," he added.
(Reporting by Naomi Tajitsu and Veronica Brown)
((RM:veronica.brown.reuters.com@reuters.net; Tel: +44 207 542 6745))
Keywords: MARKETS FOREX/EURO
Next: INTERVIEW-HWWI sticking to German '08 GDP forecast of +1.3 pct