Weekly Update: What do Austria, Belgium, France, Germany and the Netherlands have in common?

Raymond James Bond Market CommentaryWhat Do They Do Now?
By Benjamin Streed
July 10, 2012

What do Austria, Belgium, France, Germany and the Netherlands have in common? Each country had one of its sovereign yields fall to a record low last week as investors demanded more compensation than what Germany, which is considered a safe-haven, provides. Why would investors shun German yields if it is considered so safe? Germany’s two-year yield fell below zero percent on Friday, going as low as negative 0.008%, that’s why. This was the first time the yield has sunk into negative territory since June 1st and comes in direct contrast to all the monetary easing and bailout measures implemented in the Eurozone in the last month. Germany’s peer countries of Austria, Belgium, France and the Netherlands saw their two-year yields touch 0.12%, 0.43%, 0.166% and 0.071% respectively. On the flipside, further exacerbating the concerns in Europe, Spanish 10-yr yields continued their climb upwards towards the dreaded 7.00% mark, which was the level at which several countries previously buckled to bailout pressures.

Bloomberg had an interesting story late last week regarding the few remaining options in the European Central Banks’s (ECB) fight against the region’s ongoing crises. The ECB’s recent foray into the land of zero interest rates is apparently fueling some speculation that the central bank will possibly follow in the footsteps of the U.S. Federal Reserve and the Bank of England into large-scale asset purchase programs known as Quantitative Easing (QE). The idea behind such a move would be to manipulate the longer-end of the yield curve downward in hopes of spurring economic activity. In a press conference Thursday, ECB President Mario Draghi stated that the action on short-term rates will likely only have a “muted economic impact”. Unlike the Fed and Bank of England, the ECB has yet to engage in a formal QE program. Although it did purchase government bonds earlier this year the process was “sterilized” to avoid fueling any unintended inflationary pressures. As a refresher, a sterilized bond purchase would help the central bank against the effects of the foreign exchange market.

Here is the U.S., last weeks’ nonfarm payrolls number was disappointing while the unemployment rate held steady at 8.2%. Although the nonfarm payrolls number was revised upwards from +69k to +77k, this month’s change arrived at a meager +84k on expectations of +106k. As a reminder, although this number looks positive since the U.S. is creating jobs, estimates shows that the country needs to generate roughly 121k jobs per month to breakeven with the changes in population growth, changes in the workforce and immigration. One bright spot in the report was the revised change in private payrolls which showed a +105k as opposed to the +84k announced last month. On the news Treasury yields fell sharply at 8:30am as noted in the chart above. For the week, Treasury yields pushed considerably lower with the 5-yr note off 7.5bp to yield 0.643% while the 10-yr and 30-yr securities were down 9.5bp apiece to yield 1.549% and 2.662% respectively.

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