Bonds: Greek tension rising

Date: Tuesday 24 Jan 2012

These were the yields and movements on the 10 year bonds of some of the most watched countries:

Italy: 6.17% (+6bp)
Spain: 5.45% (-16bp)
France: 3.16% (+2bp)
Germany: 1.99% (+2.2bp)
UK: 2.18% (+2bp)
US: 2.07% (+2bp)

The highlight in bond markets today was a Spanish auction of €2.507bn in three and six month bonds. This was the maximum target and achieved average yields of 1.285% and 1.847%, respectively. Both were reductions on a similar auction on December 20. The bid to cover ration was an impressive 4.32.

The auction led to declines in Spanish yields but for France and Italy, the other under-scrutiny countries, yields rose as investors worried that Greece may fail to agree a voluntary agreement with its bondholders.

Yesterday, euro area finance ministers said they wanted the banks and investors who lent money to Greece to take more of the pain in bailing the country out. But this is a high stakes game with both governments and the private sector with a lot to lose.

There may still be hope. The man leading the negotiations for the banks, Charles Dallara from the Institute of International Finance, said he hoped “common ground” could be found between the two parties.

The general picture for the euroarea though is not entirely bleak. Today a closely watched puchasing manager’s index for the single currency region rose from 48.3 in December to 50.4 in January. Any number above 50 suggests growth.

Equity markets fell back today on worries over Greece but are still up since the start of the year. Meanwhile, the €489bn the European Central Bank has lent through its long term refinancing operation appears to have eased funding for the distressed European states, with Italy, Spain and France all completing successful auctions since the beginning of the year.

BS

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