European Bond Spread Widens on Speculation ECB to Stay on Hold

The gap in yields between two- and 10-year government bonds widened to the most in six weeks on speculation the European Central Bank won't raise interest rates, even with inflation above target.

Investors have bought shorter-dated notes, betting the crisis in credit markets and the euro's surge to a record against the dollar will make it difficult for ECB policy makers to raise rates this year. Swiss Reinsurance Co. said today it had made a 1.2 billion franc ($1.07 billion) loss related to the collapse of the U.S. subprime mortgage market.

``The ECB is set to remain on the sidelines in the next five to six months, and if anything there's a risk of a cut,'' said Nicholas Stamenkovic, a fixed-income strategist at RIA Capital Markets, in Edinburgh. Economic ``forward-looking indicators are clearly heading down.''

The yield on the two-year note fell 4 basis point to 3.76 percent by 10:35 a.m. in London. The price of the 4 percent note due September 2009 rose 0.07, or 70 euro cents per 1,000-euro ($1,463) face amount, to 100.40.

The difference in yield, or spread, between two- and 10-year bonds is at 32 basis points, the widest since Oct. 5.

U.S. Treasury Secretary Henry Paulson last week said the worst may still be to come in the subprime crisis, while Goldman Sachs Group Inc. estimated the slump in credit markets may reduce bank lending by $2 trillion.
book-in-finance.com