hr: Money

Photo Credit: Rainer Ebert

European government notes are on their steepest drop in a week. The notes have been on the decline for nearly two months now, and came after the declaration made by European Central Bank President Jean-Claude Trichet to the effect that there may be a hike in interest rates next month to combat inflation.

The notes’ decline has moved two-year rate-sensitive yields beyond that of 10-year German bund yields. This was a first in a span of one year that has in a way inverted what is called yield curve, after a statement by Trichet on the “heightened alertness” state of policy makers on inflation. The European Central Bank’s main refinancing rate has held within 4 percent in June 5, which was exactly what was predicted by analysts.

Climbing 33 basis points, the two-year note escalated to 4.65 percent, the most its ever done counting from April 18. Meanwhile, the note due March 2010 has declined 3 percent in value to 0.50, or 5 euros to every 1,000-euro, which is approximately $1,560 at face value to 97.28.

For quite some time, we can expect the inverted yield curve to remain. As the European Central Bank moves toward another round of tightening cycle the market braces for a couple of hikes in 2008.