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Bond Markets-Yields dip as US data sets tone

LONDON: The yields of major government bonds fell on Thursday with benign U.S. inflation data cheering the market, although bonds remain nervy ahead of a speech by Federal Resevere Chairman Alan Greenspan.

The Bank of England was the first Group of Seven central bank to hoist interest rates this year, but there was little reaction to the 25 basis point rate rise to 5.75 percent as this was widely priced into the market.

Uncertainty over future U.S. rate hikes dominated cross-market activity and bond prices spiked higher after U.S. producer price data was bang in line with expectations, enabling the market to largely shrug off stronger U.S. retail sales.

By 1715 GMT the 30-year benchmark Treasury yield had dipped 1.6 basis points to 6.701 percent on the back of a 6/32 rise in price to 92-21/32.

"The retail sales numbers were obviously strong. The U.S. market is expecting more rate hikes but again there is no evidence of inflation pressure," said Philip Tyson, bond strategist at HSBC.

A build up of inflation fears has driven benchmark bond yields to levels last seen in 1997, with the 10-year Bund edging close to 5.60 percent on Wednesday and the U.S. 30-year bond hit 6.72 percent, a two-and-a-half year peak.

U.S. producer prices rose 0.3 percent in December or 0.1 percent without the volatile food and energy components. Recent comments by Fed officials have focused on the need to combat inflation before it becomes a problem.

Retail sales over the holiday period rose 1.2 percent in December or 1.4 percent excluding autos. This compared with economists' expectations of a 1.0 percent rise, 0.7 percent excluding autos.

Analysts said the market was still wary ahead of a speech by Fed Chairman Alan Greenspan to be held in New York at 0125 GMT on January 14.

"This is the real focus and we'll be looking at this to get a guage for the timing and extent of the next tightening," said Tyson. The Fed meets to discuss interest rates on February 1-2.

European government bonds paid scant attention to euro-zone data and rose in line with U.S. Treasuries.

The benchmark German 10-year Bund yield had dropped 1.9 basis points to 5.52 percent. In futures the March Bund price was up 0.16 at 102.96.

Earlier there was little impact to tame German November retail sales data. Less positive data out later in the morning included the EMU-11 November producer price report.

British gilts outperformed other leading bond markets, with prices reacting positively to the BoE rate hike which dealers said was priced in, and rising on the back of the flat U.S. inflation data.

Analysts said gilt yields were at attractive levels and this had attracted buying interest in certain sectors of the curve although the ultra long-end had underperformed.

The 10-year gilt yield settled nine basis points lower at 5.66 percent.-Reuters