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Dutch bonds seen

lagging as CPI data

digested

AMSTERDAM: Dutch bonds shadowed bunds to a lower close on Tuesday, but were seen lagging their German counterparts as investors sell guilder debt on the strength of a disappointing rise in Dutch inflation last month.

The market shrugged off news that the consumer price index rose a much higher than expected 2.1 percent year-on-year in March, blaming the gain on the unusually bitter Dutch winter.

But clients later sold guilder bonds and dealers expected the trend to continue. "Guilders look rather expensive and people are getting worried. The volumes aren't big, but we've seen some switching into bunds," one Amsterdam dealer said.

Ten-year bond yields have been driven under bunds by the prospect of very little state supply in the next three months.

They hit a discount of minus two basis points on Thursday after trading at plus five basis points last month during tap sales of the latest 10 year bond. But this gap narrowed a basis point on the CPI news and could face further erosion.

"The diverging patterns of Dutch and German CPI as we go into the summer will certainly hinder the performance of guilder bonds, said ABN AMRO's Kirst Kuipers. Analysts had expected CPI to rice 1.8 percent in March and blamed the unexpected gain on higher food prices after an unusally long and bitter winter.

But the spectacle of headline Dutch inflation rising above two percent - coupled with the government's own estimates that it will reach 2.5 percent by the year-end - would prompt investors to sell guilders for bunds, dealers said.

The failure of the Dutch central bank to cut its special advances, or repo rate had little impact on the long end of the bond market but put the front of the yield curve under pressure.

The persistent strength of the guilder against the mark has encouraged widespread expectations of the rate cut. When the central bank signalled an unchanged 2.90 percent rate the July 1998s suffered, dealers said.

SWISS BONDS

ZURICH: Swiss franc bonds ended slightly weaker, but off today's lows, following the drop in U.S. bonds last Friday on better-than-expected U.S. jobs data.

Futures took an early hit when trading reopened in Zurich after the Easter holidays and the June-Conf contract fell to a low of 112.03 percent.

But dealers said the market had over-reacted and later they recovered to end 36 basis points lower at 112.44 percent.

The average yield on Swiss government debt rose to 4.05 percent from 4.01 percent.-Reuter