European bonds decline as stocks move upwards

London () European government bonds snapped a two-week gain as stocks rose and Federal Reserve Chairman Ben S. Bernanke said policy makers will be ready to raise interest rates when the economic outlook has "improved sufficiently".

The declines on Friday drove the yield on the two-year note up by the most in a month. The Dow Jones Stoxx 600 Index of European shares rose for the first week in three. Germany, Austria, Ireland and Slovakia sold a combined 11 billion euros (Dh59.5 billion) of debt this week, with the US auctioning $78 billion (Dh286.5 billion) in notes and bonds, including 30-year bonds two days ago that drew weaker-than-average demand.

Hawkish

"The reasons for the drop are the sluggish 30-year bond auction and Bernanke's comments, which were perceived as hawkish," said Christoph Rieger, co-head of fixed-income strategy at Commerzbank AG, Germany's second-biggest lender. "It shows the market's nervousness."

The yield on the two-year note climbed 16 basis points in the week to 1.37 per cent as of 5.28pm on Friday in London, the highest level since August 24.

The 1.25 per cent security due September 2011 dropped 0.32, or 3.2 euros per 1,000-euro face amount, to 99.77. The 30-year bond yield advanced 3 basis points to 3.92 per cent, and the yield on the 10-year bund rose 9 basis points to 3.21 per cent.

Accommodative policies

"My colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period," Bernanke said at a Board of Governors conference in Washington.

"At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road."

Policy makers worldwide have cut interest rates to records, including coordinated reductions by six central banks a year ago, to stabilise economies following a squeeze on credit that led to the collapse of Lehman Brothers Holdings Inc. in September 2008.