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Bonds: ECB fails to calm market

Date: Wednesday 21 Dec 2011

These were the movements in the yields, or interest rates, on 10 year bonds issued by some of the most watched nations:

Italy 6.788% (+17.5bp)
Spain 5.275% (+20.6bp)
France 3.125% (+2.2bp)
Germany 1.93% (-2.1bp)
UK 2.07% (-2.4bp)
US 1.95% (-2.1bp)


The sovereign bond market didn’t take the bait of the European Central Bank’s biggest move yet to calm the debt storm raging through Europe.

Today we learned that 523 banks had applied for €498bn in three year loans from the ECB. They will receive the money tomorrow.

Eurozone officials hoped that by lending unlimited amounts of money to European banks they would encourage those banks to lend more money to the businesses of Europe that so desperately need credit.

It has also been mooted that, with sovereign debt yields so high, banks may wish to cash in on the so called “carry trade” where they will borrow from the ECB at 1% and lend to Italy (for example) at 5%.

Barclays believes that, of the €498bn, €193bn will actually be injected into the EU’s financial system. A further €296bn will simply be used to pay back bank bonds due for redemption in 2012 - perhaps giving a sense of the liquidity trap many financial institutions find themselves in.

In other developments, Germany reduced the value of bonds it is planning to issue next year from €270bn to €250bn.

BS

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