Euro-zone bonds edged higher, as the euro recovered in response to a report revealing unexpected strength in German gross-domestic-product growth.

German GDP rose a real 0.4 per cent in the first quarter from the fourth quarter of 1998 and 0.7 per cent on the year, above analysts' expectations of a 0.2 per cent rise on the quarter and 0.5 per cent on the year.

The euro climbed over the $1.04 level and at midafternoon in Europe was at $1.0425, up from $1.0309 late in Asia and $1.0289 late Monday in New York.

Most traders now forecast quiet trading for the rest of the week and said most of the market's focus will be on US consumer price data due June 16, which could add to worries over inflationary pressure and heighten fears of a rise in rates.

Gilts ended weaker, undermined bythe stronger-than-expected German gross-domestic-product numbers which caused some switching out of gilts to Bunds in line with the strengthening euro against the pound.

"We are seeing a bit of sterling weakness [against the euro] which is related to the German numbers and rising hopes of a Kosovo settlement," said Mark Capleton, bond-market strategist at HSBC.

Traders said an early rise in gilts was mainly due to a weaker British Retail Consortium survey of May retail sales and excess cash in the market from the payment of coupons. Swedish bonds ended higher amid waning expectations for future rate rises, traders said, while Danish bonds rose as Bunds and other European markets got a mild boost from an improving euro.

The Wall Street Journal