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Bonds: rumour of Euro solution calms markets

Date: Monday 28 Nov 2011

Bonds: rumour of Euro solution calms markets

The Eurozone’s distressed economies appeared to mount a mini fightback on Monday as rumours of a solution to the region’s debt crisis swirled through markets. The aforementioned on the first day of a week which is expected to see heavy debt issuance and few redemptions.

French 10 year bond yields fell 8.1 basis points, to 3.61%, while those on equivalent Italian debt dropped 2.8 basis points to 7.233%, although that level is still considered unsustainably high in the medium-term by many international observers.

In Madrid, yields on 10 year Spanish debt dropped 12.7 basis points, to 6.57%. Markets learned today that the country´s regions apparently managed to eke out a small surplus in their public accounts in the third quarter. Also worth noting, the Spanish Treasury has reversed a prior decision. It will not issue a new benchmark 3 year bond but rather re-open various existing issues.


Yet perhaps the most significant drop today, however, was seen in the interest being paid by Belgium to borrow money. The country’s warring politicians had failed last week to agree on a budget for 2012, but over the weekend a deal was finally cobbled together. The result today was a drop of 28.6 basis points on 10 year Belgian debt to 5.577%.

The improvement in the prospects for the weaker Eurozone nations is being driven by a possible plan to toughen up the Stability and Growth Pact, the agreement which underpins membership of the single currency. Current rumours indicate that rules on budget deficits and national debt will be made stricter. This, in turn, may give Angela Merkel, the German Chancellor, political room to provide more support for the endangered countries.

According to the latest data out from the European Central Bank today the eurozone´s monetary authority increased its debt repurchases last week by 7%, to €8.581bn.

As demand for haven assets decreased slightly so the yield rose on German bunds, with the rates offered by 10 year debt climbing 3.6 basis points to 2.3%. The interest paid by US 10 year treasuries also climbed, up 4.3 basis points to 2.01%.

The yield on 10 year UK gilts dropped 1.7 basis points, to 2.27%. Once again, Britain is paying less to borrow money than Germany.

Lastly, and according to the Financial Times, Fitch has backed a call for reform of the sovereign bond insurance market.

BS

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