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. Last Updated: 07/27/2016

Bond Slide Could Recur, Analysts Say

LONDON -- International debt markets regained some composure Monday after a U.S.-led tumble on Friday, but bond analysts still see more pain ahead.

With economies in Japan and Germany showing signs of life and the possibility of a U.S. interest rate rise in July, the short end of high yielding markets seems the best bet, they said.

"I don't think there's much to commend any of the major debt markets as a bullish play," said George Magnus, chief international economist at UBS in London. "The one exception might be some short-end opportunities."

U.S. Treasuries were trading lower again in London by midday, but analysts expected the market to steady after unexpectedly strong May payroll data sent it diving on Friday.

European bond futures markets were all trading higher.

"There may be some short-covering support and maybe some consolidation," Magnus said. "I don't think it's going to be a one-way street just yet."

But Magnus said the Japanese "tankan" survey of business confidence and German industrial orders, which also came out Friday, would add fire to arguments that the world's major economies are heating up, further depressing bond prices.

"It's notable that the week ended on three particularly poignant growth reports," he said.

German April industrial orders rose 2.2 percent in April, and 0.1 percent year-on-year. Economists had expected a 0.5 percent rise from March. Meanwhile, the Bank of Japan's quarterly tankan survey showed the business outlook of major manufacturers had improved since the previous survey in February.

The Japanese economy was by no means roaring away, but showing a gradual recovery, Magnus said.

While chances of an interest-rate rise in Japan and Germany were next to nothing in the short term, a rate rise at the next meeting of the U.S. Federal Open Market Committee on July 2 to 3 was a possibility, analysts said.

"Obviously there is a concern now about the possibility of an increase in rates in the U.S. which will obviously set the tone for the world market," said Mark Cliffe, chief international economist at HSBC Markets in London. Cliffe, however, did not see a tightening.

Magnus saw greater opportunity in the short-end of the high yielding markets. "Particularly where you've got some possibility of interest rates coming down -- Italy, Sweden, maybe Spain."