European Government Bonds May Drop; Concerns Over Faster Growth, Inflation

Debt fell yesterday, pushing two-year yields to the highest in more than a month, as reports showed German producer prices rose by the fastest in almost 24 years, and Belgian consumer sentiment rebounded in June. European Central Bank President Jean-Claude Trichet is due to speak today, and may flag the stronger data, according to Alessandro Tentori at BNP Paribas SA.

The yield on the benchmark German two-year bond, among the securities most sensitive to changes in rate expectations, rose 3 basis points yesterday in London to 3.46 percent, its highest since May 12. The price of the 3 percent bond due March 2008 fell 0.05, or 50 cents per 1,000 euro ($1,263) face amount, to 99.26. Bond yields move inversely to prices.

Goods from plastics to newsprint were 6.2 percent more expensive in May than a year earlier, the biggest increase since June 1982, a report yesterday showed. Economists expected a gain of 6.4 percent, according to the median of 34 forecasts in a Bloomberg survey. From April, prices rose 0.1 percent.

Rates Still `Low'

Consumer prices in the euro region rose 2.5 percent from a year earlier after gaining 2.4 percent in April, the European Union's statistics office said June 15. The reading matches an initial estimate of May 31 and the median forecast in a Bloomberg survey. Inflation erodes the value of a bond's fixed payments.

The Frankfurt-based ECB said in its monthly bulletin last week inflation may hold above its 2 percent ceiling this year and next, and that rates are still "low'' after being raised three times since December.

Policy makers at the ECB on June 8 lifted the refinancing rate to 2.75 percent. Economists expect the ECB to lift its benchmark rate to 3.25 percent by Dec. 31, according to a Bloomberg survey.

Interest-rate futures imply traders calculate the central bank will lift rates to 3.25 percent by year-end. The yield on the three-month Euribor contract due in December 2006 rose 2 basis points yesterday to 3.51 percent, from 3.07 percent at the start of the year. (Bloomberg)