European govt bonds track Treasuries higher on weak U.S. data, equities

LONDON (Thomson Financial) - European government bonds were tracking their U.S. counterparts higher, benefiting from safe haven flows as equity markets came under further pressure following yet more weak housing market data from the world's largest economy.

Equity markets -- a gauge of risk appetite -- pushed lower after the National Association of Realtors revealed that U.S. existing home sales fell 2.6 percent to an annual rate of 4.86 million units in June, a 10-year low and worse than forecasts for a smaller decline to 4.94 million.

"The decline in existing home sales was larger than consensus expectations - which centred on a 1.0 percent decrease -- and bonds traded higher on the release," said Sireen Hajj, as associate at Calyon.

Adding to the negative backdrop for housing market activity was news that mortgage financier Freddie Mac has reported a huge jump in mortgage rates this week. "The jump in mortgage rates is likely to have had a negative impact on mortgage application activity this week," said Sally Ann Runyan, an analyst at Thomson Reuters IFR Markets.

The weak U.S. data cemented gains European bonds had already enjoyed following a raft of weak euro zone data, which dented expectations interest rates in the 15-nation single currency area could rise again. The flash euro zone manufacturing and service PMI indexes both fell further into contractionary territory, with the composite measure dropping from 49.3 to 47.0 - well below analysts expectations for a reading of 49.0. A reading below 50 indicates activity is falling.

Germany's Ifo index, a key measure of business confidence, also fell to 97.5 from 101.2 in June, missing forecasts for 100.00.

Meanwhile gilts remained higher following a weak set of UK retail sales figures. Sales plummeted 3.9 percent in June from May, the largest fall since records began in 1986. Analysts said the numbers are likely to prevent the majority of Monetary Policy Committee members from backing their colleague Tim Besley's call for an interest rate hike next month.

"June's UK retail sales data finally showed the official data moving into line with the gloomy anecdotal evidence," said Vicky Redwood, UK economist at Capital Economics.

"We therefore still doubt that many other MPC members will share Tim Besley's view that interest rates need to rise," she added. At Yield Change on 1458 GMT pct previous close Sept euribor future (Liffe) 94.975 up 0.030 Dec euribor future (Liffe) 94.865 up 0.070 GERMANY Sept bund future (Eurex) 110.69 up 0.72 4.25 pct July 2018 govt bond 97.39 4.58 up 0.48 FRANCE 4.00 pct April 2018 govt bond 94.27 4.74 up 0.64 ITALY 4.50 pct Feb 2018 govt bond 95.40 5.16 up 0.55 UK Sept gilt future 105.94 up 0.49 5.00 pct March 2018 govt bond 100.09 4.99 up 0.45 Sept short sterling future 94.12 up 0.05 Dec short sterling future 94.18 up 0.10 [e-mail] cml/ajb COPYRIGHT Copyright Thomson Financial News Limited 2008. All rights reserved.

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