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Bonds: Italian yields down, Spain rising

By Ben Shore

Date: Thursday 17 Nov 2011

Bonds: Italian yields down, Spain rising

Readers of this column may be wanting to know about bond yields. Fair enough. But before sending in our latest missive from the edge of financial Armageddon, let us first consider the architecture of Stansted Airport.

The Norman Foster-designed building is well known for having a series of so called “Jesus bolts” holding the pyramidal structures of its ceiling in place. They are so-called because if they are unscrewed the last words you would here before the entire building collapsed would be “Jesus....”.

The twin Jesus bolts of the Eurozone economy are Italian and Spanish debt yields. They determine how much each country will be paying to service its debts. Today, the bolt seemingly most likely to give way, Italy, actually tightened. At 16:20, the yield on Italian 10-year bonds had fallen from its opening level of 7.02% to a less alarming 6.84%. 7% has long been considered the threshold level at which countries cannot sustain their borrowing (a la Portugal, Ireland and a nation once referred to as “Greece” but which is not mentioned in polite company any more).

There have been rumours circulating that the European Central Bank has been aggressively buying Italian debt in an effort to bring its yield down and the price movement today would seem to bear those rumours out.

So, sitting under this ceiling we like to call the EUROPEAN ECONOMY, things are looking moderately less frightening than yesterday. Until, that is, one casts an eye slightly to the west and begins to look at the cruel trajectory of Spanish debt. We currently refer to this as the Espanic bond, as in, “Es panic senor”.

Today, Spanish 10-year yields reached their highest point since the euro currency was introduced: 6.78%; perilously close to the death point of 7%. Since that moment of high anxiety at 11:57 things have actually got significantly better, with the yield down to 6.488% at 16:33.

The spike in yield occurred as the Spanish government sold €3.56bn worth of 10-year notes at an average yield of 6.975%. The so called bid-to-cover ratio, which tells us how many bids were received for each euro’s worth of debt was 1.54 as opposed to 1.76 for a similar auction in October.

As Spain and Italy battle it out to see who can terrify everyone most comprehensively there is one other country worth worrying about: France.

If Spain or Italy did find themselves unable to pay their debts, the current market thinking is that somehow the Eurozone would cobble together a rescue package. If France went, well...Jesus. Today, France raised €6.98bn via auctions of two-year and five-year bonds but had to pay a higher price than at last month's auction.

On the open market however France’s yield had fallen 7 basis points to 3.64% by 16:45 amid a general perception that risk has very slightly abated in the euro area.

In other price movements today, US 10-year treasuries have lost ground as demand for ultra safe assets lessened. At 16:45 the yield on US 10-year debt had risen by 1.9 basis points to 2.02%

In Frankfurt, German 10-year notes were offering a yield of 1.9%, up 8.3 basis points.

Equivalent 10-year UK debt rose 7.2 basis points to 2.23%

BS

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