Euro-zone government bonds underperformed a resilient European corporate bond sector in the first quarter of the year and the coming three months could see more of the same, analysts said yesterday.
Within government bonds, Ireland stood out as a major loser in the first quarter, down 1.34 per cent in euro terms and double the currency bloc's average loss.
"Ireland has one of the worse inflation records in the euro zone and so it is not surprising to see it suffering with higher yields," said Mr Marc Ostwald, of Monument Derivatives in London.
With mounting evidence of economic recovery, government bond yields on both sides of the Atlantic have risen sharply in 2002 as investors position themselves for higher interest rates and seek higher-yielding assets.
Corporate bond prices have been volatile, pummelled by weak company earnings, but have ended the quarter firmer in anticipation of an economic rebound.
While government bonds may outperform in the near term, they are likely to succumb to profit-taking and credit markets will end as the more lucrative asset to hold, said Mr Graham McDevitt, global head of credit strategy at ABN Amro in London.
Government bonds showed a negative return of 0.54 per cent between January 1st and March 22st while corporate bonds lost just 0.09 per cent, according to data from Merrill Lynch.
Accelerating consumer prices reported last week in Germany, France and Italy - the euro zone's largest economies - and fears over wage inflation as Germany's industrial relations deteriorate in an election year, are fuelling fears that euro-zone debt is in for a rough ride before the summer.
