Bonds: Distressed nation yields fall on EU deal

Date: Friday 09 Dec 2011

Bond markets reacted positively on Friday to the outcome of the EU summit in Brussels which appeared to lay the basis for a more stable currency union.

The debt crisis has arisen mainly because fixed income investors stopped believing certain euro area countries would be able to pay their debts. Those fears appear, for the moment at least, to have abated.

The main elements of the EU summit deal that bond investors have been mulling are:

* €200bn in extra funding for the IMF to prop up euro area countries

* An agreement to limit private sector involvement in future bail outs. This reduces the risk to banks if Spain or Italy goes bust.

* An agreement amongst 26 of the 27 EU member states (not the UK) to enshrine new budget rules in their constitutions. This caps annual structural deficits to 0.5% of GDP

* Almost automatic punishments for EU countries if their budget deficits exceed 3% of GDP

At the close in Frankfurt these were the yields on the most watched bond issuing nations:

Distressed:
France 3.262% (-9.5bp)
Italy 6.354% (-10bp)
Spain 5.746% (-6.8bp)

Non-distressed
UK 2.16% (+4.1%)
Germany 2.15% (+13.2bp)
U.S. 2.05% (+7.9bp)
Japan 1.02% (+2.2bp)

BS

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