May 2012
In April, government bonds followed a now-familiar pattern: lower yields and higher prices in the “core” nations of the US, Germany and the UK, but the opposite for troubled peripheral European economies.
US jobs figures were weaker than expected, prompting a “flight to safety”. Both US Treasury and German Bund yields fell sharply as investors elected to switch from equities to less risky asset classes. Meanwhile, a disappointing Spanish debt auction, the first since its government revealed details of an austerity budget, rattled peripheral European debt markets. Political ructions in the Netherlands and France also served to unnerve investors.
The European Central Bank announced that Spanish banks had borrowed €227.6 billion in March through the long-term refinancing operation, a huge jump from February’s figure. Spanish ten-year yields fleetingly climbed above 6%, a level commonly regarded as unsustainable, and Italian yields were also dragged higher. In contrast, German yields moved towards an all-time low. UK Gilts also benefited from their safe haven status, with ten-year yields moving below 2% at one stage.
This pattern continued throughout April. The market appears convinced that the ECB interventions are waning in effectiveness, and Spanish and Italian yields remained at elevated levels through to month end.
After a strong first quarter, corporate bonds moved lower in April. Financials were the biggest fallers, and sterling bonds underperformed their euro-denominated counterparts. However, higher-yielding credit was largely unchanged over the month.
