(Updates with Wall Street outlook)
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 before trimming gains.
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 74
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.
OVER SOON?
Improvement in risk appetite pushed stock indexes around the
world. Tokyo stocks rose 2.4 percent <> while the
FTSEurofirst 300 index <> rose 1.2 percent, thanks to
strong Q1 earnings results from Ericsson <ERICb.ST> and Volvo
<VOLVb.ST>.
MSCI main world equity index <.MIWD00000PUS> were up 0.1
percent. U.S. stock futures were up 0.4 percent <SPc1>,
indicating a firmer open on Wall Street later.
"For investors, the financial sector crisis is moving more
and more into the background, and growing hopes that it'll soon
be over is bolstering sentiment in equities and credit markets,"
LandesBank Berlin said.
The dollar was up 0.3 percent against six major currencies
<.DXY> while the euro slipped below $1.56 <EUR=> after hitting
record highs above $1.60 earlier this week. The euro has
retreated after some tempering of hawkish statements by European
Central Bank policymakers.
Emerging sovereign spreads <11EMJ> tightened 13 basis points
while emerging stocks <.MSCIEF> rose 0.1 percent on the day.
U.S. light crude <CLc1> resumed rise, trading up 0.8 percent
at $116.97 a barrel after setting a record high near $120 this
week. Gold <XAU=> ticked higher to $888.10 an ounce after
hitting a three-week low earlier.
(Additional reporting by Kirsten Donovan, editing by Mike
Peacock)
