European debt in tailspin over Irish political crisis

Investors fatigued with the notion of sovereign bailouts reversed Monday’s gains in Irish bond prices and pulled the rug from beneath the feet of debt-stricken governments around the region. Core European government bonds felt the benefit of safe haven flows sending yields lower as grief spreading from Dublin washed up on the shores of Spain, Portugal, Ireland and Italy whose yields all rose on Tuesday. Crumbs of risk appetite continued to be brushed off the table as the negative tone was beset by a clash on the border of South and North Korea. Selling in regional stocks spread to the rest of the world causing further purebred buying in U.S. treasuries.

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Eurodollar futures – Yields fell to the lowest in more than a week on account of growing Eurozone concerns and despite a healthy jump in third quarter GDP. More cautiously optimistic American consumers were persuaded to part with their money while companies exported more goods abroad in the three months ending in September raising GDP to a 2.5% annualized pace and a half percent better than the initial flash forecast. The pace of growth accelerated from 1.7% in the second quarter. The overall nervous tone to trading was, however, gripped by a worsening situation in Europe and despite a knee-jerk print lower for December treasuries when the data was announced, the contract is clinging to a half-point gain at 125-19 sending the 10-year yield lower to 2.75%. Eurodollar futures also made healthy gains shaving six pips off implied forward yields.

European bond markets – Monday’s price gains on the relief that the Irish government accepted that the island was too small to “go it alone,” were rudely undone on Tuesday. The yield premium demanded by investors in Irish paper widened as the yield surged 29 basis points while German yields lost seven basis points as buyers returned to the shelter of bunds. The December contract rose 66 ticks to 128.60. But it wasn’t just Ireland feeling the fallout of its government’s failure to carry through the bailout. Investors came to the swift conclusion that a new government carrying the voice of an angry population might be less inclined to take on its bankers’ follies as a result of the real estate collapse. Portuguese government yields rose 19 pips, a fall in Spanish bonds sent the yield higher by 14 basis points and Greek yields rose a further eight basis points leaving the premium over German bunds at 921 basis points.

British gilts – British debt prices rose but trailed bunds. A BBA home lending report was the weakest in 19 months and further stoked demand for government debt. The December gilt future rose by 61 ticks to 121.76 while short sterling futures maintained accelerated price gains in the 2012 strip where implied yields fell by eight basis points.

Japanese bonds –Tokyo was closed for a holiday while the electronically traded JGB future dipped nine ticks to 141.14.

Australian bills –Sliding Asian stocks were supportive of Aussie government bonds where prices rose sending the yield down eight basis points to 5.39%. Investors bought bonds for fear of spreading contagion across the Eurozone, while escalating tensions between North and South Korea grabbed the news headlines further rattling nerves.

Canadian bills – Short-dated bills of acceptance were under only mild selling pressure in today’s environment on account of rising inflationary pressures. Had Tuesday not been characterized by rising global fears among investors, bills and bonds might have performed differently to increasing consumer price pressures. Canadian government bond futures rose alongside treasury futures with the yield falling three basis points or by only half as much as U.S. yields fell. The 10-year future expiring in December stands at 123.96 to yield 3.06%.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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