Bonds rally on safe haven demand

Government bond yields fell over the week amid growing risk aversion among investors.

While inflation concerns remain, particularly for the US, the attraction of government bonds as a safe haven investment has seen prices rally over the week due to increased demand.

US Treasuries saw some selling pressure at the shorter end of the yield curve on Friday following a week in which core consumer price inflation came in higher than expected, but the overall pattern for the week was higher prices and lower yields.

Investors will be keenly watching speeches next week from the Federal Reserve chairman Ben Bernanke and two other Fed members for clues on near-term interest rate policy direction.

The two-year Treasuries saw yields rise slightly on Friday morning to 4.933 per cent, up 0.4 basis points, but they were still down about 8bp on the week. Meanwhile, the gap between two-year and 10-year bonds narrowed, flattening the yield curve, as 10-year yields slipped a further 3.3bp to 5.030 per cent, leaving them more than 17bp down on the week.

UK and European government bonds had a mixed session, with morning increases in yields being replaced mostly by falls later in the day on Friday.

Among gilts, the 10-year yield stood out with 2.8bp rise on the day to 4.603 per cent, but this retrenchment followed the largest single-day move for that maturity this year on Thursday. Ten-year yields were still about 13bp lower over the week.

Meanwhile, two-year gilts saw yields decline further in spite of official figures showing a faster-than-expected increase in the UK money supply that suggested greater likelihood of an increase in interest rates soon from the Bank of England. The two-year gilt yield was 1.9bp lower at 4.731 per cent, leaving it 9bp down on the week.

European government bond yields also ended lower, having been higher earlier in the day. The two-year Schatz saw its yield slip 0.8bp to 3.299 per cent – 9.6bp down on the week. The 10-year bund yield lost 1.8bp at 3.989 per cent, 9bp down on the week.

Foreign influences proved more powerful than domestic ones in shaping the Japanese government bond market. The yield on the benchmark 10-year note fell 3.5bp to 1.905 per cent, taking its cue from overnight US Treasuries. But the market ignored strong gross domestic product figures for Japan, which suggested the economy had grown faster in the first quarter than expected.