January 2012
December saw the European single currency lurching from crisis to crisis. It brought to an end a year in which government bonds in the UK, Germany and the US performed extremely strongly. The ten-year Gilt yield fell below 2% for the first time during 2011. From a starting point of 3.4%, it ended the year at 1.98%. US Treasuries and German Bund yields also both finished the year well below that level, representing large gains. In contrast, investors shunned the peripheral eurozone economies of Greece, Italy and Spain, whose borrowing costs remain alarmingly high. As at 30 December, ten-year Italian debt yielded 7.08%, a figure regarded as unsustainable by the market. More encouragingly, Spanish ten-year yields closed 2011 at 5.1%, still high but down from 5.45% at the start of 2011.
Global monetary authorities launched a series of actions in December to stem the growing crisis. Just before the start of the month, six of the world’s biggest central banks tried to boost liquidity by cutting the price of emergency dollar loans by 50 basis points. At the same time, China’s monetary authorities cut banking reserve requirements and Brazil’s central bank lowered its benchmark interest rate. Meanwhile, the European Central Bank cut interest rates by 25 basis points, unveiling a raft of “non-standard” policy measures aimed at easing growing tensions in the corporate-bond market.
Any respite, however, was temporary – and many saw it as a warning sign that the sovereign-debt crisis was starting to affect major countries outside the eurozone region. Next came a Franco-German announcement agreeing “comprehensive” new fiscal rules for the eurozone. But the early optimism this generated was dispelled by ratings agency actions. Standard & Poor’s warned that most of the bloc’s 17 members – including six AAA-rated members – faced downgrades.
Under these circumstances, corporate-bond markets performed relatively well. Although the lack of market liquidity remains a major concern, confidence that financial companies have made progress in shoring up their balance sheets boosted the sector. There were gains across most parts of the market, resulting in a narrowing of the spread in yields between government and corporate bonds.
