US Treasuries declined as diminishing concerns over the worsening credit market reduced the flight to quality to government debts. The yield on the benchmark 10-year note finished the week at 4.08 percent, the highest level in a month. Bonds initially rallied on concerns that US banking-system turmoil may be worsening after Fed’s proposal to shore up mortgage-lenders Fannie Mae and Freddie Mac. Bonds then slumped later in the week as Citigroup, JPMorgan chase and Wells Fargo released better-than-expected quarterly results, which eased market sentiment.

In the economic data front, US consumer prices reached 5 percent year over year in June, the biggest jump since 1991. Prices paid to US producers also rose in June, driven by surging fuel costs that heightened the risks of inflation. The 1.8 percent increase was the biggest gain since November. The core PPI exclude fuel and food increased 0.2 percent, slightly less than forecast. Higher fuel and raw materials prices are likely to hurt corporate profits and exert pressure on corporates to raise prices.

CDS, the cost of buying credit default protection, on Citigroup’s bonds fell the most in three months to 155 basis points after it reported a smaller-than-expected net loss of 2.5 billion in Q2. On the other hand, CDS on Lehman Brothers, the fourth-largest US securities firm, rose 2 basis points to 378 after Moody’s cut the company’s long-term senior debt rating by one level to A2.

Australian government bonds headed for another weekly gain as yields on the 10-year note closed at 6.34 percent. According to data released last week, the import price index is 1.4 percent and export price index is 13.5 percent. Meanwhile, the Reserve Bank Governor commented that the chances of keeping Australia’s inflation rate low over the medium term are good as the highest borrowing costs in 12 years will slow down the economy.  The deteriorating economic backdrop will also allow room for the Reserve Bank of Australia to keep interest rates unchanged throughout the year. 

European government notes fell, pushing the 10-year yield to a two-week high as German producer prices accelerated to the fastest pace in 26 years, reaching the level of 6.7 percent year-on-year, the most since 1982. Inflation also accelerated to the fastest pace in 12 years, reaching 3.4 percent y-o-y last month. Meanwhile, German investor confidence declined by more than expected to the lowest level since 1991. Across the EU region, industrial production fell the most in 16 years in May.

UK Gilts posted the biggest weekly decline in more than a month on concerns that inflation is accelerating. The UK budget deficit widened to 9.2 billion pounds in June as the economic slowdown sapped tax receipts. The shortfall, the most for the month since 1993, was up from 6.3 billion pounds a year earlier. Britain is already issuing a record GPB 80 billion of debt in the fiscal year that started in April to help shore up public finances hurt by the credit crisis and slowing growth.

Emerging markets remained volatile with thin liquidity. The JPM EMBI+ spread index tightened to 284bp.

In Brazil, retail sales rose 10.5 percent in May from a year ago. But inflation remains the biggest concern for policy makers.

In Mexico, the central bank raised its policy rate by 25bp to 8 percent last week with a statement saying the balance of risks on inflation has worsened.

Turkey’s central bank also raised its benchmark interest rate to 16.75 percent last week as it seeks to regain credibility after surging global oil and food prices forced it to increase inflation target. Although inflation unexpectedly slowed to 10.6 percent in June from a 14-month high of 10.7 percent a month earlier, the bank said it still saw pressure on prices from rising energy costs.