European Bonds Have Weekly Gain on Stocks Drop, Growth Concern
March 7 (Bloomberg) -- European 10-year government bonds rose for a second week as traders bet losses in stocks and signs economic growth is faltering will boost demand for the safest securities.
Government debt rose today as Asian and European stocks tumbled on speculation credit-market losses will deepen and the dollar's slide to a record low against the euro will stunt growth. Bunds gained after the European Central Bank kept interest rates at 4 percent yesterday to combat inflation, which erodes the value of fixed-income assets.
``It's all about fear and the search for safe havens,'' said Glen Marci, a fixed-income strategist in Frankfurt at DZ Bank AG, Germany's largest cooperative lender. ``People are trying to go to any safe haven and bunds are first choice. That isn't likely to change anytime soon.''
The yield on the bund, Europe's benchmark, fell 10 basis points this week to 3.78 percent as of 4:45 p.m. in London. The price of the 4 percent January 2018 note rose 0.85, or 8.5 euros per 1,000-euro ($1,534) face amount this week, to 101.72.
The yield on the two-year note dropped 5 basis points to 3.26 percent today, after declining as much as 25 basis points. The note may yield as little 3.05 percent in the next two weeks, Marci predicted. Yields move inversely to bond prices.
European bonds extended gains after a report showed the U.S. economy unexpectedly lost jobs last month. Payrolls fell by 63,000, the biggest drop since March 2003, after a decline of 22,000 in January that was larger than initially estimated, the Labor Department said. Economists surveyed by Bloomberg News had projected payrolls to rise by 23,000.
Stocks Decline
Asian stocks had their biggest weekly drop since August, with the MSCI Asia Pacific Index falling 2.5 percent. Europe's Dow Jones Stoxx 600 Index fell 0.4 percent. Bunds trimmed gains as stocks pared losses today.
Government bonds also gained as the cost of protecting corporate bonds from default soared to a record, according to traders of credit-default swaps.
``The ongoing flight to quality means the downside risk will be limited, even though the ECB won't be cutting rates soon,'' said Nick Stamenkovic, a strategist at RIA Capital Markets in Edinburgh who correctly forecast 10-year yields would fall to 3.8 percent this week. ``The continued weakness of risk assets will support'' government bonds.
The ECB reduced its prediction for economic growth to about 1.7 percent for this year and 1.8 percent for 2009, from a December forecast of 2 percent and 2.1 percent, respectively.
`Policy Stance'
Bunds gained even as ECB council member Axel Weber said slowing economic growth doesn't give ``sufficient reason'' to expect weaker inflation pressures anytime soon, indicating the central bank is unlikely to cut interest rates.
``The current policy stance in the euro area has to be judged as contributing to achieving our medium-term objective of price stability,'' Weber said in a speech in Oslo today. ``Weaker growth prospects do not pose sufficient reason to expect a damping of inflationary pressures in the foreseeable future.''
Industrial production growth in Germany unexpectedly accelerated in January, a government report today showed. Output in the $2.9 trillion economy rose an adjusted 1.8 percent from December, when it gained 1.5 percent, the Economy Ministry in Berlin said.
The dollar fell to a record low versus the euro after the weaker-than-forecast U.S. jobs report reinforced speculation the Federal Reserve will cut its main rate by 1 percentage point.
Rate Bets
Futures showed traders see a 6 percent chance the Fed will cut its key rate on March 18 to 2 percent, while the odds on a reduction to 2.25 percent were at 94 percent. The odds on a percentage point drop in rates were zero yesterday.
``The ECB has been sounding more hawkish while the Fed is sounding more and more dovish,'' David Woo, London-based head of currency strategy at Barclays Capital, said in a Bloomberg Television interview. ``That's been the major driver'' of euro strength.
The difference in yield between French and German 10-year bonds widened to 24 basis points today, the most since 1998. That compares with an average 8 basis points for the past 12 months. It was at 3 basis points in May.
Widening spreads between German government bonds and those of Italy, Greece and other European Union countries are a ``wake- up call to be very cautious as regards to fiscal policies,'' ECB President Jean-Claude Trichet said yesterday.
The budget shortfall in France, the second-largest of the economies that share the euro, rose 16 percent in January from a year earlier, to 6.6 billion euros, the Paris-based Finance Ministry said yesterday.
esci finchè sei in tempo 
