960411

French bonds ease

after intervention

rate cut

PARIS: French bond futures slipped slightly after the Bank of France cut the intervention rate by 10 basis points to 3.70 percent, in line with expectations.

The June bond future on Matif traded at 121.82 shortly after the cut, down from 121.92 before the announcement.

June Pibor slipped three basis points to 95.84. Traders had expected the contract to be hit by profit taking after the Bank of France meeting.

The yield on the 7.25 percent 2006 government bond was unchanged at 6.58 percent and the 10-year UAT/Bund spread was steady at nine basis points.

The decline came at the same time as a slide in German and US bonds and analysts said the French move was not really driven by the intervention rate cut.

"The (bond future) was definitely due a pullback, but domestic bond holdings are still very strong and we haven't seen anyone trying to sell it", said Steve Major, bond analyst at Credit Lyonnais in Paris.

Major said Pibor contracts needed a cut of more than ten basis points to justify some of the flows that had been going into the front end and that the June contract had got a bit expensive.

"It was a case of buy the rumour sell the fact", he said.

Analyst said there was still scope for the Bank of France to move independently of the Bundesbank.

"It definitely still has room to reduce the spread over the German repo rate, but I don't think it wants to move too quickly to avoid upsetting the markets", said Jean Louis Mourier, economist at Louis Dreyfus Finance.

The spread stands at 40 basis points at the moment and Mourier said the French central bank's objective would probably be to get it down to 20, but only when spreads in the cash market narrowed further.

Technical analysts said there was little danger of the bond future falling much without a big slide in the US market. They said there was strong support around 121.40.

Some analysts in Paris said the 10-year spread over Bunds could soon reach zero and yields in France could soon be lower than German 10-year yields.-Reuter