Level 2

Bonds: Central banks take on the debt market

Date: Wednesday 30 Nov 2011

Bonds: Central banks take on the debt market

A co-ordinated policy adjustment by six major central banks has given a significant lift to distressed European debt.

The announcement by the Fed, the European Central Bank, the Bank of England, the Bank of Japan, the Swiss National Bank and the Bank of Canada to reduce the interest rate on dollar swaps was intended to help European banks struggling to access dollar markets.

The move will make liquidity easier to come by but, as several analysts have noted, does not solve the essential problem which is that much of the collateral European banks hold is currently considered toxic.

The change to the dollar swap interest rate came on the same day that the Chinese authorities reduced the capital ratio requirements for their banks from 21.5% to 21%.

The combined effect on equity markets has been dramatic with several European bourses up in excess of 3.5% on the day.

The impact in the sovereign debt market has also been notable, although the interest rates Euro area countries are still paying are still crippling.

At 4:25 benchmark Italian 10 year bonds were yielding 7.01%, a drop of 22.2 basis points on the day or 0.222 percentage points. Equivalent 10 year French notes were down 11.9 bpts at 3.4%, and Spanish 10 year debt had fallen 16.1bpts to 6.23%.

Belgian bonds, which for a short time had threatened to become a new addition to the debt crisis horrow show have receded on news of an agreement over a budget for 2012 and the possibility of an elected coalition government after 535 days without one. At 4.30pm Belgian 10 year notes were yielding 5.03%, down 29.7bpts on the open.

The move by the central banks has reduced the market "perception of risk" and so mildly impacted on haven securities, like US treasuries; the 10 year variety was yielding 2.09% at 4.27pm, up 10bpts on the day. German 10 year bunds gained during the day, forcing the yield down to 2.28%, a fall of 4.9bpts. British 10 year gilts rose 7.7bpts to 2.31%.

BS

« Go back to news channel

Email this article to a friend

or share it with one of these popular networks:


Top of Page