European 10-Year Yields Hold Near Six-Week High on Money Supply

Sept. 27 (Bloomberg) -- Ten-year European bond yields held near a six-week high after a report showed money-supply growth was close to the fastest in 28 years last month, reinforcing the European Central Bank's concern about inflation pressures.

Benchmark government debt dropped earlier after reports showed consumer-price inflation quickened in six German states in September. ECB policy makers have this week said there are ``persisting'' risks for price growth in the 13-nation euro- region economy.

``Inflation is picking up again'' in the region, said David Keeble, head of fixed-income strategy at Calyon in London. ``I'm worried that if it stays above 2 percent going into next year the ECB will become increasingly hawkish.''

The yield on the benchmark 10-year German bund fell 1 basis point to 4.37 percent by 4:23 p.m. in London, after earlier rising to 4.41 percent, the highest since Aug. 14.

The price of the 4.25 percent security due July 2017 rose 0.09, or 90 euro cents per 1,000-euro ($1,415) face amount, to 99.01.

Benchmark 10-year bunds have returned investors 2.4 percent this quarter, compared with a return of 1.5 percent on two-year notes, according to indexes compiled by Merrill Lynch & Co.

M3 money supply, which policy makers use to gauge future inflation, expanded 11.6 percent in August from a year earlier, after growing 11.7 percent the month before, the ECB said today.

Policy Makers Speak

ECB forecasts ``indicate continued growth and persisting risks for inflation,'' policy maker Guy Quaden, who is also governor of Belgian's central bank, said yesterday.

Fellow ECB council member Nicholas Garganas said Sept. 24 the euro's advance to a record versus the dollar won't be enough to diminish price pressures in the $10.5 trillion economy. The common European currency rose to the strongest since its 1999 debut for a sixth day running today.

Central bank President Jean-Claude Trichet today said on Dutch television it's ``too early'' to decide whether financial- market turmoil will hurt economic growth in the euro region.

``At this stage, it is probably too early to make a judgment on the impact,'' Trichet said in an interview with the RTLZ channel, recorded yesterday and published on its Web site today. ``I can only say that uncertainty has augmented.''

Consumer prices in North Rhine-Westphalia, Hesse, Brandenburg, Baden Wuerttemberg, Saxony and Bavaria accelerated last month, separate reports today and yesterday showed. Germany is Europe's biggest economy and its bonds are the benchmark European government debt.

German Inflation

Inflation in Germany as a whole may accelerate to 2.5 percent this month from 2 percent in August, based on a harmonized European Union method, according to the median of 22 estimates in a Bloomberg News survey.

Germany's Federal Statistics Office is due to publish an initial CPI estimate later today, based on the reports from the six states.

Bunds reversed earlier declines after the Bloomberg purchasing managers index showed European retail-sales growth slowed in September, led by the sharpest drop in Italy since June 2005.

The gauge measuring retail sales slipped to a seasonally adjusted 50.5 from 51 in August. The index is based on a survey of more than 1,000 executives compiled for Bloomberg LP by NTC Economics Ltd. A reading above 50 indicates expansion.

The European Central Bank said today it loaned at least one bank 3.9 billion euros at its penalty rate, the most in almost three years, suggesting credit markets are still unable to meet the banking system's needs.

Italy today sold at auction 2.5 billion euros of 4.5 percent bonds due August 2010, 1.5 billion euros of seven-year floating- rate notes and 3 billion euros of 10-year 4.5 percent securities due 2018.