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Euro bonds hurt equities
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January 4, 2000: 7:54 a.m. ET
Benchmark bond yield hits two-year high; euro recovers, but shares slide
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LONDON (CNNfn) - European bond yields surged to a two-year high Tuesday while the euro climbed sharply as investors dumped dollars amid fears of higher interest rates on both sides of the Atlantic.
The benchmark 10-year German bund yield topped 5.5 percent, its highest since November 1997, and peaked at 5.6 percent in morning trade as investors sold holdings of fixed-income securities built up as a cushion against any impact that Y2K problems might have had on stocks.
Analysts said the European markets were following the sharp sell-off in U.S. bonds Monday which saw yields on the benchmark 30-year Treasury reach a 28-month high of 6.68 percent.
However, the dollar was the main victim as analysts predicted that quickening economies in Europe would see the growth differential between the region’s economies and the United States would narrow, encouraging investors to hold more euro-denominated assets.
The U.S. bond sell-off hurt the dollar and pushed the euro to a two-week high of $1.0335. That was a gain of more than a cent for the European currency from its New York close.
The single currency’s move later caused euro-zone bond yields to fall back to 5.375 percent at midday in London. "The markets are in a tail-chasing mode,” said Phyllis Reed, chief international bond strategist at Barclays Capital in London.
The initial rise in bond yields sparked a sharp sell-off in European equities in early trade, with London, Paris and Frankfurt all nursing losses of more than 2 percent.
Analysts said investors’ attention was now focused on the next European Central Bank (ECB) rate-setting meeting in February. Alongside expectations of higher U.S. rates, most analysts expect the ECB to hike rates by at least a quarter of a percentage point amid continuing signs of stronger economic growth in the 11-nation euro-zone.
"There has been a noticeable shift in euro-zone sentiment,” said Razia Khan, treasury analyst at Standard Chartered in London, noting what she described as "verbal intervention” by economic officials. "ECB officials in particular see the need to do something.” 
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European Central Bank
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