Eurozone government bonds rallied and yields fell yesterday as data showing weakening business confidence eased fears of aggressive interest rate rises.

Germany’s Ifo research institute said its business climate index for Europe’s largest economy fell from 98.7 in October to 97.8 in November, below expectations. The biggest fall in confidence was in the retail sector.

The European Central Bank is expected to raise interest rates next week for the first time in five years from its level of 2 per cent. But the results of the survey tempered fears that a move would lead to a series of hikes. Jean-Claude Trichet, the ECB president, also reaffirmed earlier signals that rises would be limited.

“The ECB will need to be lightning quick applying a rate hike next week and another in January before it is forced to batten down the hatches,” said David Brown, chief European economist at Bear Stearns.

Lucy Hartiss, international economist at Capital Economics, pointed out that the survey reading was still the second highest since January 2001 and well above September’s reading of 96.

Still, Bund prices rose sharply. With the US market closed for holiday, thin trading volumes also prompted more volatile movements. In late afternoon trading, the yield on the two-year Schatz was down 6.9 basis points to 2.699 per cent and the yield on the 10-year Bund was 6.2bp lower at 3.412 per cent.

The bullish sentiment in the eurozone helped lift gilt prices across all maturities despite comments from Mervyn King, the Bank of England governor, who indicated during a Treasury Select Committee testimony that interest rates were likely to stay on hold.

The UK Debt Management Office sold £525m of index-linked gilts maturing in 2013 in an auction that was met with robust demand. The yield on the two-year gilt lost 2.4bp to 4.251 per cent and the 10-year gilt yield fell 3bp to 4.181 per cent. The 30-year gilt was down 3.1bp to 4.112 per cent and the 50-year gilt was trading at 3.999 per cent, 3.6bp lower.

The yield on the benchmark 10-year Japanese government bond fell 3.5bp to 1.435 per cent – its lowest close since late September. Yields remained under pressure in the wake of recent comments from senior Japanese government figures warning against Bank of Japan hawkishness.

The US Treasury market, closed yesterday, will be open for trading for part of the day today.

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