By Natsuko Waki
LONDON, April 25 (Reuters) - Government bonds in developed
economies fell on Friday after Japanese inflation hit a decade
high and signs that firms are escaping the worst of the credit
crisis tamed expectations for aggressive interest rate cuts.
Better-than-expected first quarter earnings reports in
Europe and the United States pushed world stocks up towards this
week's three-month high while the dollar hit a one-month peak
against major currencies after firmer U.S. labour market data.
Japanese annual inflation jumped to 1.2 percent in March,
triggering one of the biggest ever sell-offs in yen bonds.
Rising inflation expectations as a result of a recent surge
in oil and commodity prices from rice to tin come at a time the
global economy faces a U.S.-led slowdown as shock waves from the
credit crisis threaten to hit consumers and corporates.
However, growing relief that corporate profitability is
holding up and banks are making progress towards cleaning up
their credit-related troubles has ignited a rally in risky
assets and a sell-off in safe-haven government bonds.
"There's an improvement in risk appetite, growing confidence
the worst is over in the financial sector and a growing
conviction the Federal Reserve is close to the end of its easing
cycle. Consequently there's a massive unwinding of safe-haven
trades and position squaring," said RIA Capital Markets
strategiest Nick Stamenkovic.
"It's a U.S.-led phenomenon but it is evident across the
globe in the major G7 bond markets."
Japanese government bond futures suffered their biggest
one-day loss in five years with June 10-year futures <2JGBv1>
falling 1.49 point to 135.59.
U.S. Treasuries and euro zone government bond prices fell in
tandem, pushing up yields across the board. The two-year U.S.
Treasury yield climbed to a three-month high of 2.492 percent
<US2YT=RR> while the 10-year euro zone government bond yield
<EU10YT=RR> rose 3 basis points to 4.227 percent.
On the foreign exchanges, the dollar was up 0.5 percent
against six major currencies <.DXY> while the euro slipped below
$1.56 <EUR=> after hitting record highs above $1.60 earlier this
week.
In the interest rate market, investors moved to either price
out or scale back interest rate cut expectations.
In Japan, swap contracts on the overnight call rate
<JPONIBOJ=TRDT> are reflecting a 70 percent chance of a Bank of
Japan rate hike by the end of the year, having priced in a 50-60
percent chance of a rate cut at the start of the month.
U.S. interest rate futures markets are pricing in a 72
percent chance that the Fed would cut the cost of borrowing by a
quarter point next week, having fully priced in such a move
earlier this month.
The euro has retreated after some tempering of hawkish
statements by European Central Bank policymakers.
Tokyo stocks rose 2.4 percent <> while the FTSEurofirst
300 index <> rose 0.6 percent, thanks to strong Q1
earnings results from Ericsson <ERICb.ST> and Volve <VOLVb.ST>
MSCI main world equity index <.MIWD00000PUS> were up 0.1
percent.
Emerging sovereign spreads <11EMJ> tightened 9 basis points
while emerging stocks <.MSCIEF> were steady on the day.
U.S. light crude <CLc1> extended losses to $115.40 a barrel,
down 0.5 percent on the day, as a firmer dollar sparked a
sell-off after oil prices set a record high near $120 this week.
Gold <XAU=> ticked lower to $884.75 an ounce.
(Additional reporting by Kirsten Donovan, editing by Mike
Peacock)
