European Bonds Appear Likely To Rally as Interest Rates Fall
With unemployment rising to 10 percent in Europe, economic growth is essential to create jobs there. The factor that will most make it happen is lower interest rates, and that will cause a rally in bonds.</br></br>Europe's currency problem "was never about exchange rates," according to David C. Roche, a Morgan Stanley & Co. global strategist who writes from London, "but about interest rates, growth and jobs.Û</br></br>Real interest rates have been extremely high for some time, and have helped crush many of EuropeÛªs economies. Consequently, the European Community finance ministers on Aug. 1 widened the trading bands for most European currencies. This action allowed those members to ease monetary policy and allow interest rates to fall.</br></br>"As central banks cut rates, so bonds should rally significantly," said Julian Callow of LondonÛªs Kleinwort Benson Ltd. However, for various reasons, the central banks have been slow to reduce short-term rates to date.</br></br>The yield on 10-year French government bonds, which easily could double as a proxy for most European bonds, already has declined dramatically this year. Analysts believe the yield has a lot more room to fall over the next six to 12 months.