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Plus ça change as European bonds tank

By Ben Shore

Date: Tuesday 22 Nov 2011

Plus ça change as European bonds tank

It is a moot question how many times observers of the euro area bond market can say 'things have taken a turn for the worse'. Logically, there has to be an end to it.

If it carries on getting worse something will give and the yield/price ratio of bonds will be the least of our worries. At that point it will be a question of whether (or not!) we can get our money out of cash machines.

With that in mind, things got worse in the euro area today.

Starting with the usual suspects: Spain has seen the interest rate on its debt rise 0.051 percentage points, or 5.1 basis points. Currently 10 year Spanish bonds are yielding 6.604%, following comments from the country's new Prime Minister Mariano Rajoy that a European agreement is needed to "save" Spain's debt obligations. Rather unhelpfully, his deputy leader also made clear Spain couldn't afford to finance itself at 7%. Tell us something we didn't know Senora Maria Dolores de Cospedal.

Not to be outdone however, Italy managed to be just a smidgen closer to the 7% death point than its near neighbour. Italian 10 year yields had risen 15.3 basis points to 6.81% at 4:45PM.

The agonies of Spain and Italy are well known. The likelihood that both, or either, may simply stop borrowing on the open market has already been broadly accounted for by many traders. The real fear is that France could soon join them north of 6%.

Today, French 10 year bonds reached a yield of 3.53% at 4:46PM, admittedly not in the danger zone of Italy or Spain but a worrying 161 basis points from Germany's 1.92% yield, giving a sense of how differently the twin engines of the European economy are viewed by lenders.

Rumours continue to swirl that France could be about to lose its AAA credit rating with both Standard & Poors and Moody's, hinting France's economic credibility is worsening. If France did lose its AAA status it would have huge ramifications for the safety net now theoretically in place for Italy, Spain, Portugal, Ireland and Greece. France's ability to underwrite other countries' debts would be diminished as its own position was questioned, but let's not think about that too much eh?

As the storm clouds over Europe blackened, Germany's government reiterated its opposition to the European Central Bank becoming the lender of last resort and buying the debt of distressed euro area nations. “We don't have any new bazooka to pull out of the bag," said the finance spokesman for German Chancellor Angela Merkel’s Christian Democratic bloc. Having said that, later in the day it transpired that what Mrs. Merkel may in reality still be gunning for is closer fiscal union.

In Greece, where this crisis was gestated, born and grown to its current hideous form, the leader of the opposition New Democracy party, Antonis Samaras, continued to play an intensely high stakes game of chicken with the European Union. He does not want to sign a pledge to implement the budget cuts that are a condition of the emergency loans currently keeping the lights on in Athens. If he refuses to sign, Greece may not get its next tranche of funding and will quite simply run out of money in 20 days time. If you think the riots have been bad so far, think what will happen when no public sector wages are paid, and emergency services, electricity and water suppliers stop working.

In the US, growth appeared to be slowing, with a revised quarterly gross domestic product figure showing annualised growth of 2% as opposed to previous estimates of 2.5%. What with all the abject terror on the other side of the Atlantic, however, American debt looked a reasonable bet, the yield on US 10 year treasuries was up 1.7 basis points but still looks very low against most euro area countries, at 1.97%.

Will things "take a turn for the worse" tomorrow? Tune in tomorrow afternoon to find out.


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