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Euro government bonds: The shape of things to come

A single European currency looks increasingly likely to be instituted on schedule on January 1 1999. With this in mind government bond strategists are trying to predict the likely shape of the euro market. A few patterns, such as the transition towards a credit-driven market, are emerging. But much still hinges on decisions yet to be taken. Philip Eade reports

When politicians from the so-called Club Med countries of southern Europe say they intend to qualify in time for the first round of the EU's economic and monetary union (Emu) ­ due to start, as the Bank of England has taken to saying, in just 550 business days' time ­ it's time for the financial markets to sit up and take notice. That they have done so seems clear from recent movements in bond market indices and the growing demand for advice and information on the likely shape of new markets.

By late last month, following budgets in Italy, Spain and Portugal designed to meet Maastricht treaty criteria for entry to a single currency, the yields on the long-term government bonds of each of these countries had fallen by around 100 basis points over German Bunds since the beginning of the month, to 230bp for Italian bonds and 150bp for Spanish and Portuguese ones.

But just as discussions about which countries will be in and which will be out of Emu have moved to a new stage, so too has the debate about the future shape and mechanics of the euro government bond market.

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