LONDON (Thomson Financial) - European government bonds were flat as hawkish comments by European Central Bank president Jean-Claude Trichet offset concerns about a potential crisis in the US housing market.
Trichet told the European Parliament that the ECB is ready to take "firm and timely action" to counter inflation risks if necessary, suggesting once again that area wide rates are set to go up over coming months.
He also stressed that interest rates in the area remain accommodative.
"There has been a whole raft of speeches from ECB officials, including from Trichet himself, all sounding relatively hawkish about interest rate prospects in the euro zone," said Jonathon Loynes, chief European economist at Capital Economics.
"A number have suggested European interest rates are still low, and that the growth of the economy is still strong, so I think that was just reinforcing the impression that the ECB is still quite firmly in tightening mode, and that interest rates will rise again before long, possibly in September," said Loynes.
The Trichet comments helped offset concerns about the US subprime market.
Bonds were higher earlier as yesterday's warning from two leading credit ratings agencies of a potential crisis in the US housing market continued to dominate flows to the relative safety of the bond market.
News yesterday that Standard&Poors and Moody's had placed billions of dollars worth of US subprime bonds on review for a possible downgrade, enabled bonds to rally globally amid renewed concerns about the outlook for the world's largest economy.
"The US dollar and equities remain in the firing line while government debt and a dash to cash remain investors' favourite ploys for damage limitation" from sub-prime concerns, said analysts at Bear Stearns.
As well as watching for further developments on the subprime market, analysts said the market will also be keeping a close eye on US earnings for indications of a wider fall out in the world's biggest economy.
Some companies closely affiliated with the housing market, such as house builders and house depots have already issued profit warnings. Further warnings from non-housing related companies could be of concern for the Federal Reserve, which has kept quiet on its assessment of the upcoming monetary outlook.
Meanwhile in the UK, gilts were also flat after tracking their European counterparts.
At Yield Change on
1038 BST pct previous close
Sept euribor future (Liffe) 95.625 dn 0.005
Dec euribor future (Liffe) 95.425 dn 0.020
GERMANY
Sept bund future (Eurex) 110.68 up 0.02
3.75 pct Jul 2017 govt bond 97.59 4.58 up 0.08
FRANCE
3.75 pct Apr 2017 govt bond 93.28 4.64 up 0.02
ITALY
4.00 pct Feb 2017 govt bond 94.40 4.82 dn 0.03
UK
Sept gilt future 103.81 dn 0.03
4.00 pct Sept 2016 govt bond 89.70 5.43 up 0.02
Sept short sterling future 93.84 dn 0.01
Dec short sterling future 93.73 dn 0.02
chinny.li@thomson.com
cml/cml/jfr
