German bunds bubble as European stresses mount

German bunds were inching towards a fresh high ahead of the weekend as concerns remained elevated that Greek Prime Minister faces an insurmountable hurdle next week as he presents a €78 billion austerity package to Parliament, without the passage of which would leave his nation on the brink of default and the first in the short history of the Eurozone area. Bank of England Governor Mervyn King commenting in the central bank’s financial stability review warned that throwing money at Greece was not a solution, highlighting the challenge faced by European leaders as they attempt to keep the eels in the bucket. But Europe’s drama didn’t stop in Athens after Moody’s sent Italian banking shares in to a tailspin as it warned over a potential downgrade as risks and borrowing costs were likely to rise.

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European bond markets – The September bund contract spent much of the day in the doghouse after a German IFO business confidence reading shocked investors by improving on the prior reading at a time when most data reports can be used to compile a dossier confirming economic slowdown. Shortly after the start of electronic trading bunds eased as equity prices recovered setting a poor tone for fixed income trading. The IFO measure just affirmed the mood and sent the September future to 126.73 at its lowest point. However, a slide in Italian banking shares following a Moody’s warning that they could be vulnerable to a downgrade as sovereign risks rise in Europe shook investors whose glare was cast purely on events in Athens. This week’s confidence vote for Papandreou was hardly a slam-dunk given the finely balanced margin of victory. Next week’s passage of deep austerity measures is far from guaranteed and has accelerated the demand for German paper. The 10-year yield eased by two more basis points late in the day as the contract set off fresh highs at 127.31.

Eurodollar futures – The 10-year yield spread between German and U.S. denominated debt accordingly widened to seven basis points as the core European bund saw accelerated demand. Treasuries faced a mild hurdle, however, in the form of a stronger than expected reading for May’s durable goods report where orders advanced by 1.9% while an April decline was massaged higher. Curiously the early advance for stocks has simply vanished following nervous European stock benchmarks lower. The September Treasury note future is three ticks higher with the benchmark yield stable at around 2.91% although the yield dip hasn’t extended to Eurodollar futures just yet with the strip lower in price by one tick.

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