Govt bonds lower in London trade ahead of Greenspan testimony

European government bonds pushed lower ahead of the much-awaited testimony by Federal Reserve chairman Alan Greenspan before a US Senate Committee later today, which could provide further clues about the state of the US economy and US interest rates, dealers said.

Analysts expect Greenspan to project a more cautiously optimistic tone in his address due to start at 3pm Irish time, as rumours suggest that he felt that his Jan 11 speech was interpreted too negatively.

However, economists said caution would remin the key element in his outlook for the US economy.

"Greenspan will wish to avoid remarks that risk pushing the market interest rates higher," John Davies of West LB said.

He said he expects Greenspan to take the view that the economic slowdown is at best bottoming out rather than showing signs of the imminent recovery that the market is pricing in.

A weak euro further dented sentiment in the bond market, dealers said.

The euro weakened against the dollar as negative comments on the state of the German economy by European Central Bank president Wim Duisenberg hurt hopes of a swift upswing in the single currency area.

Guillaume Salomon of UBS Warburg bond prices are catching up with the fall in Treasuries.

"Bunds are catching up with the fall in US Treasuries overnight," Guillaume said, noting that demand for yesterday's two-year note sale was weak.

The high rate on the 2-year notes auctioned was the lowest since the auction on Nov 28, 2001 when 3% 2-year notes were sold for a high yield of 3.008%

Comments by the American Bankers Association Economic Advisory Committee that the Federal Reserve is very close to the completion of its interest rate easing cycle also weighed on Treasury prices overnight.

The European Central Bank's monthly report is due at at 10.00 am, but economists expect it to reiterate the banks's well-established stance, and therefore to have no impact on the bond market.

In the UK, gilts were also lower, tracking European and Treasury issues, in the absence of domestic data.