World Crisis Online

p class=”partner”> By Emma Charlton and Keith Jenkins

March 4 (Bloomberg) — German two-year government note yields climbed to the highest in more than two years after European Central Bank President Jean-Claude Trichet said yesterday he may increase interest rates next month.

Greece’s two-year yields reached the highest since May 10, the first trading day after the European Union and the international Monetary Fund announced the creation of a bailout fund to backstop the euro. Trichet said yesterday it’s “possible” that rates will rise at the central bank’s April meeting. His comments drove the German two-year yield up 23 basis points, the biggest increase since January 2009.

“Trichet was pretty clear that there would be a hike come April, so that’s going to underpin the German front end going forward,” said Eric Wand, a rates strategist at Lloyds Bank Corporate Markets in London.

The two-year note yield was little changed at 1.78 percent as of 12:47 p.m. in London after reaching 1.84 percent, the highest since December 2008, according to data compiled by Bloomberg. The 1.5 percent security due March 2013 traded at 99.45. The yield on German 10-year bunds, Europe’s benchmark government debt securities, was one basis point lower at 3.32 percent.

European Central Bank Executive Board member Lorenzo Bini Smaghi told a central banking event in Paris today that a failure to raise interest rates in response to faster headline inflation would allow core inflation to quicken.

March 25 Deadline

“This over time will fuel core inflation,” Bini Smaghi said. “This is a key sentence in my interpretation of yesterday’s introductory statement.”

Trichet is due to speak at the same Banque de France conference alongside other governing council members including Athanasios Orphanides and Christian Noyer. The ECB’s anti- inflation stance comes as European Union leaders approach a March 25 deadline for a reinforced plan to aid debt-strapped countries.

Greece’s two-year yields surged 38 basis points to 15.29 percent. The yield difference between German two-year notes and Greek securities of a similar maturity was 13.51 percentage points, the widest since May 7, according to data compiled by Bloomberg.

German debt was little changed before a U.S. labor market report that is forecast to show employers added 196,000 workers last month, after a 36,000 gain in January, according to the median estimate of 84 economists surveyed by Bloomberg News. The report may also show the jobless rate increased to 9.1 percent from 9 percent.

U.S. Spread

“Right in front of payrolls data, people aren’t going to want to set too much risk on their books,” Wand said.

The yield difference, or spread, between German two-year notes and U.S. securities of the same maturity, narrowed four basis points to 98 basis points. It reached 103 basis points yesterday, the highest since Dec. 30, 2008, as traders added to bets that the European Central Bank will raise borrowing costs before the Federal Reserve.

The rate at which European banks say they see each other lending for three months in euros rose to the highest in 20 months amid speculation the Frankfurt-based central bank will tighten monetary policy next month. Three-month Euribor climbed six basis points to 1.162 percent today, the highest since June 24, 2009, data from the European Banking Federation showed.

Inflation Threat

The ECB, which left its key rate at a record low of 1 percent yesterday, is concerned about so-called second-round inflation effects, when companies raise prices and workers demand more pay to compensate for soaring energy and food costs, Trichet said. Euro-area inflation accelerated to 2.4 percent last month.

Euribor futures fell, pushing the implied yield on the contract expiring in December 2011 up two basis points to 2.18 percent. Earlier it rose to 2.215 percent, matching the highest since Feb. 22, 2010.

Forward contracts on the euro overnight index average, or Eonia, signal investors think the ECB will increase the key rate 25 basis points by its July meeting, Deutsche Bank AG data shows.

“We are seeing consolidation at substantially increased yield levels,” said Kornelius Purps, an interest-rate strategist at UniCredit SpA in Munich. “The market has priced in three interest rate hikes by the end of the year.” UniCredit has “penciled in a rate of about 2.5 percent by the end of this year,” on the two-year, he said.

Since the end of January, Greece’s 10-year bonds have risen on six trading days, falling on 18. They fell for the seventh- straight day today, pushing the yield up three basis points to 12.1 percent.

German government bonds lost investors 2.3 percent this year, compared with a 0.7 percent loss for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek debt returned 1.7 percent over the same period, the indexes showed.

–With assistance from Jeffrey Black in Frankfurt. Editors: Matthew Brown, Mark McCord.

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To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Keith Jenkins in London at Kjenkins3@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net