Bonds: Fed action reduces demand for UK, US bonds

Date: Friday 14 Sep 2012

These were the yields and basis point movements of some of the most watched 10 year bonds just before the close in Europe:

Spain: 5.80% (+17bp)
Italy: 5.03% (+11bp)
France: 2.26% (+9bp)
Germany: 1.70% (+14bp)
UK: 1.95% (+14bp)
USA: 1.85% (+14bp)

The bonds of the UK, Germany and the US all fell, pushing up their yield, on Friday following the announcement of stimulus action by the US Federal Reserve.

The Fed said last night that it will launch its third round of quantitative easing, or QE3, by purchasing mortgage-backed securities at a pace of $40bn a month “to support a stronger economic recovery” and make sure that inflation stayed close to its target. It will also continue its Operation Twist programme to extend the maturity of its holdings.

This has been perceived as lessening risk within debt markets and so demand for the debt of safer countries reduced.

Meanwhile, the interminable wait for Spain to ask its European partners for help in tackling its banking and regional government debt crisis continues.

There had been hopes a formal request for aid would be made this week, but it appears the Spanish government is playing hardball with its EU peers, mindful of the difficulties Greece has endured under the “supervision” of creditors. The wait, though, is pushing up the yield on Spanish debt.

BS

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