Bonds Tumble as Speculation War May Be Averted Damps - Demand for Safe Debt

www.bloomberg.com Fri, 14 Mar 2003, 10:22am EDT By Morag MacKinnon

Sydney, March 14 (Bloomberg) -- Australian bonds tumbled, sending yields to a two-month high, after the U.S. signaled it may extend diplomatic efforts to disarm Iraq. Gains in stock futures crimped demand for the safety of government debt.

President George W. Bush is open to extending into next week diplomatic efforts and he seeks a diplomatic solution'' to the confrontation with Iraq, his top aides said. Bush is willing to go the extra mile for diplomacy'' and debate on the Iraq resolution at the United Nations may go into next week, White House spokesman Ari Fleischer said.

``The more conciliatory tone we are seeing from the White House has encouraged people to diminish their expectations for war which is seeing equities bid and bonds sold,'' said Greg McKenna, a market strategist at National Australia Bank Ltd.

The 6.5 percent bond maturing in May 2013 fell 1.249, or A$12.49 per A$1,000 amount, to 108.480 at 8:43 a.m. in Sydney. Its yield rose 15 basis points to 5.4 percent, its highest since Jan. 16. The yield on the 7.5 percent bond maturing in July 2005 rose 14 basis points to 4.62 percent. A basis point is 0.01 percentagepoint.

The futures contract for Australia's S&P/ASX 200 stock index due in March jumped 1.7 percent.

Speculation about a U.S.-led attack on Iraq has spurred demand for the safest securities while Australia's benchmark S&P/ASX 200 stock index has dropped 10.4 percent this year.

The Australian dollar bought 59.46 U.S. cents compared with 59.40 U.S. cents in late Asian trading. The currency has lost 3 percent of its value this week.

``We've had the clean out that we needed,'' said McKenna, who forecasts the currency will extend its 6 percent gain this year and rise as high as 65 U.S. cents by June. He recommends buying the currency when it dips to around 59 U.S. cents.