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Bond Markets

Firm stocks, inflation fears weigh

LONDON: Major government bond yields edged higher on Tuesday, under pressure from stronger equity markets and economic data suggesting inflation may be accelerating, analysts said.

Gains in blue chip and technology shares played the biggest role in setting direction for U.S. Treasuries, while euro zone bonds also looked to inflation data and moves in the currency.

"It's a story of other factors. The stocks are firm again, most especially the S&P and Nasdaq," said Charles Diebel, fixed income strategist with Societe Generale Strauss Turnbull.

Treasuries and equity markets have traded in an inverse fashion in recent sessions, with stock market weakness prompting safe haven buying of bonds and equity gains reversing those flows.

U.S. stocks were higher in the late morning on Tuesday as the blue chips continued to soldier back from last week's defeat, while the Nasdaq market gunned ahead on a bullish outlook for semiconductor companies.

The Dow Jones industrial average.DJI gained 37.15 points, or 0.37 percent, at 10,075.8, building on its advance from the previous session that drove the index above 10,000 after closing on Friday below the important mark.

In Europe, bonds were also under pressure from economic data showing inflation pressure in the euro zone may be accelerating, analysts said.

The market dipped into negative territory following a report that Germany's preliminary inflation data for February rose 1.8 percent, the highest year-on-year increase since December 1997.

The numbers followed a report showing annual consumer price inflation in the 11-nation euro zone rose two percent in January, the highest rate in two years and the European Central Bank's (ECB) ceiling.

"You had some strong data. Inflation, oil or otherwise, hit two percent, which is (the ECB's) limit, so that's not particularly constructive," said Diebel.

"We can see from preliminary German February data that we can expect further rises next month. So there's a lot of pressure on the ECB to hike rates, probably not this week, but before too long," he added.

Euro debt received an early boost from the euro. Yields fell after the currency broke above $0.98 on rumours of the Bundesbank buying the currency. Both the Buba and the ECB declined comment. Yields began to move back up after the currency returned below $0.97.

"The most important thing at the moment is the euro. People are looking at the euro. When the euro was jumping this morning to $0.9850 the market was jumping here," said one Frankfurt-based trader.

"After the euro came back and traded in a narrow range, the same thing happened in the futures market," he added.

The euro's weakness has increased market nervousness ahead of a meeting on Thursday of the ECB's rate-setting Council. However, most economists still think the ECB will only hike rates next month.-Reuters