The widening of premiums to euro-area record highs commanded by investors willing to hold Italian and Spanish government bonds speaks volumes as confidence in leaders’ abilities to solve the Eurozone crisis comes crashing down on the Empire of Debt. Faith in central bankers’ and political leaders’ ability to cut through the jungle of budget deficits sank to its lowest point yet as speculators recognize that if the sovereign debt crisis is spreading to a nation the size of Italy then a new and larger bailout fund is required.
Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/p.php?f=daily_analysis#bond-clear
European bond markets –Heading towards the close of trading for European bonds, investors are in no mood to change course as the European sovereign debt crisis deepens. German bonds have surged while peripheral nations’ bonds slumped forcing yields in opposing directions and causing spread differentials to widen to the widest since the single currency was launched 12 years ago. The rumor mill churned out several worrisome stories over the weekend, each of which sparked renewed concerns that a sovereign debt crisis is increasingly likely to happen and that a rescue plan requires deeper pockets than the current €740 billion bailout fund. Germany’s Handelsblatt newspaper claimed that the ECB had approached several key banks in recent days urging them to apply to act as advisors in the event of default somewhere within the region. German Finance Chief Wolfgang Schaeuble is busy trying to douse the fire sparked by Die Welt, which claimed that discussions to double the rescue fund to €1.5 trillion are underway so that in the event that the crisis inflicts turmoil on Italy the authorities will be able to fight it. The FT said that authorities are close to accepting a partial Greek default in order to progress to a more permanent solution. German bunds surged with the yield sliding by 15 basis points to a seven-month low at 2.67%. Implied yields on shorter-dated cash slid by an equal amount and moved contrary to the central bank’s move towards policy tightening.
British gilts – The British yield curve flattened with a mirror-image shift in rate expectations to that seen ahead of the Greek vote. Short-dated yields rose on escalating liquidity fears while deferred short sterling futures rose sending yields lower by up to 12 basis points and widening some spreads from the front of the curve to the back by 15 basis points. September gilt futures soared by 120 ticks sending the yield 11 basis points lower to 3.08%. The path for yields on Monday is littered with potholes en route. The variety of unfolding scenarios generated by weekend press reports all point to the same worrisome conclusion that so many investors had thought likely, that a sovereign default is more plausible than ever before. In addition the domestic yield curve was further pressured by a BRC report for June showing like-for-like store sales fell by 1.4% last month for a further contraction.