Conditions remained favourable in the international government bond markets in August, benefiting from the increased uncertainty on the global economy and the growing risk of a military intervention in Iraq. Once again, both the Federal Reserve and the European Central Bank kept interest rates unchanged, confirming investor expectations that were reinforced by the continued weakness in real economy on both sides of the Atlantic.

In the electronic secondary securities market (HDAT), turnover reached new record highs amounting to EUR 57.23 billion (the previous was in November 2001 at EUR 56.69 billion), compared to EUR 46.24 billion a month earlier and EUR 22.92 billion in August 2001. Investor interest focused on bonds with maturity up to 5-years, with EUR 26.8 billion worth of transactions (47% of total market turnover), and on bonds with maturity between 7 and 10 years, with EUR 13.7 billion (24%). Among individual bonds, the most actively traded was the 5-year bond maturing on 19.4.07 recording transactions of EUR 6.73 billion, followed by the 10-year benchmark maturing on 18.5.12 with EUR 6.14 billion. From the 10,528 orders executed on HDAT, 51% were purchases and 49% sales

Bond prices, especially at the longer end of the curve, recorded during August the strongest monthly gains from the beginning of the year. The 3-year bond price was up 69 price basis points (bps) at 102.18 on 30 August and the 20-year bond rose 317 bps to 107.43. The 10-year benchmark closed at 102.70 (yielding 4.89%) from 100.60 (5.17%) at the end of July.

The yield curve steepened slightly while moving downward during August as the 3- to 20-year yield spread widened by 3 bps to 148 bps at the end of the month. The 3-year yield declined to 3.81% at month-end from 4.09% the previous month and the 20-year yield to 5.29% from 5.54% respectively.

In line with the widening EMU-periphery spreads, the monthly average yield spread of the 10-year benchmark bond over Bunds was up at 35 bps from 34 bps in July.