Portfolio

Bonds: Tension eases as ECB steps in

Date: Tuesday 20 Dec 2011

Bonds: Tension eases as ECB steps in

These were the movements on the yields of benchmark 10 year bonds amongst some of the most watched nations

UK FTSE 100 +1.02%
France CAC 40 +2.73%
Germany DAX 30 +3.11%
Italy FTSE MIB +2.87%
Spain IBEX 35 +2.44%
Stoxx Europe 600 + 0.53%

COMMENTARY

In November 1942, with the tide of war turning, Prime Minister Winston Churchill told the Lord Mayor’s Luncheon at Mansion House:

“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

As observers look at the bond market today, with the European Central Bank having this morning turned on the liquidity taps, the mood (as opposed to the reality) might be analogous to that faced by the allies in the very guts of war, 1942.

From today any Eurozone bank can borrow unlimited quantities of money for up to three years, using, as collateral the very bonds (from the likes of Italy, Spain and France) which have brought the single currency area so low. We will know tomorrow the level of uptake of the facility but market expectation is hopeful.

No one can pretend that the debt crisis has ended but with this injection of liquidity into the banks one facet of the problem may have been neutralised.

In addition, some cursory monthly numbers have hinted at better things to come.

The Ifo economic institute in Frankfurt’s business confidence survey rose from a reading of 106.6 in November to 107.2 in December. This was better than expected.

In the UK a consumer confidence survey from the Nationwide Building Society showed November better than October.

Most obviously, Spain managed to sell €5.6bn in three and sixth month debt at significantly cheaper interest rates than it achieved at a similar auction in November.

The yield on two year Italian bonds had dropped a full 15.9 basis points by the close in Milan.

This may well prove to simply be an uptick on the downward path to oblivion. But today, at least, Europe has drawn ever so slightly back from the chasm.

BS

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