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European Bonds Log Weekly Gain; Euro Rise Stokes Growth Concern
Em My, q10 0909862752

By Gavin Finch
Nov. 24 (Bloomberg) -- European government bonds gained this week as concerns a surge in the euro will crimp economic growth and erode company profits drove investors out of stocks and into fixed income assets.
Two-year debt rose by the most in two weeks after the 12- nation currency breached $1.30 for the first time since April 2005, sending all 18 western European benchmark equity indexes except Iceland lower. A stronger euro makes exports from the region more expensive in the U.S., the destination for a fifth of European companies' sales.
The weakening dollar has ``definitely had the positive impact on the euro-region bond markets one would expect,'' said Kornelius Purps, a fixed-income strategist in Munich at UniCredit Markets and Investment Banking. ``A strong euro isn't good for Europe's exporters and we've seen a decline in European stock markets because of that.''
The yield on the benchmark two-year note, which is more sensitive to changes in rate expectations than longer-dated debt, fell 4 basis points in the week to 3.66 percent at 4:25 p.m. in London.
The price of the 3.5 percent security due September 2008 rose 0.07, or 70 euro cents per 1,000 euro ($1,294) face amount, to 99.72. Bond prices move inversely to yields.
The common currency has risen more than 10 percent this year versus the dollar as the European Central Bank has indicated that signs of robust growth will result in higher interest rates in the $10 trillion economy.
Accelerating Inflation
The Dow Jones Stoxx 600 Index slid 0.8 percent to 355.75 as of 4:22 p.m. in London. The Stoxx 50 dropped 0.9 percent and the Euro Stoxx 50, a measure for the 12 nations sharing the euro, fell 1 percent.
A report today showed German consumer-price inflation accelerated more than expected in November. Rising inflation erodes the value of fixed income bonds.
Prices in Europe's largest economy increased 1.5 percent from a year ago, the Federal Statistics office said. Economists surveyed by Bloomberg had forecast a rate of 1.4 percent.
ECB policy maker Klaus Liebscher warned the central bank would ``keep vigilant'' on inflation, Reuters reported today, citing an interview. The phrase has been used before to signal an imminent rate increase.
Several ECB council members have joined Liebscher in voicing their concern this week that inflation is too high, and indicating further rate increases may prove necessary to curb inflation in the region.
Business Confidence
A French government report today showed business confidence in the region's second-largest economy held near the strongest in five years. Insee, the Paris-based national statistics office, said its index of sentiment among manufacturers held at 107 after October's reading was revised to 107. The gauge reached 109 in April, the highest since March 2001.
Benchmark debt fell by the most in three weeks yesterday after an industry report showed business confidence in Germany unexpectedly rose in November to match a 15-year high, its seventh quarterly rise in a row.
The Munich-based Ifo institute's gauge of business sentiment gained to 106.8 from 105.3 in October, its seventh quarterly rise in a row. The median forecast in a Bloomberg survey of economists was for a drop to 105.2. The index matched the 15-year high reached in June.
Traders are betting on at least one more interest-rate increase from the ECB next year, futures prices show. The yield on the three-month Euribor futures contract for March fell 2 basis points to 3.83 percent today.
The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB's benchmark rate since 1999.