Bond Auctions In Euro Zone Highlight Fear In The Market

Flag of European UnionUS markets were trending higher on Friday on thin volume after closing lower for six days in a row.  Investors snapped up beaten down sectors ahead of the stock market’s 1 pm closing, with technology and financials leading all ten sectors of the S&P 500 higher in early trading.

In spite of these modest early morning gains, the S&P 500 and the Dow Jones Industrial Average remain on schedule to have their worst Thanksgiving week in nearly forty years.

Markets in Europe were lower following German Chancellor Angela Merkel restating her resistance to issuing joint bonds in the Euro zone, sparking nervousness among investors that a lasting solution to the debt problems in the region can not be found.

A bond auction in Germany also failed earlier this week, spooking markets and igniting fears than even the strongest countries in the Euro zone are not exempt from the crisis plaguing the region.

Merkel Stands Firm After Failed Bond Auction

Alongside her peers in Italy and France, German Chancellor Angela Merkel stated that a sudden agreement to either eurobonds or a change to the role of the ECB was unlikely, even in light of the goal of progressing toward a more fiscal union in the European union.  Merkel cited the belief that that the incentive for individual states to better their financial discipline would be removed in the event of joint eurobonds.

Merkel came under pressure by France to allow the European Central Bank to act resolutely to stop the flight out of bond markets in Europe that has served to raise doubts as to the fate of the single currency.  France had hoped that Germany would back down in its opposition to the ECB taking on a larger role in combating the crisis following Wednesday’s failed German bond auction.

Following Wednesday’s German bond auction, German Bund futures dropped to their worst level in close to a month, as the German debt agency found no buyers for half of a $7.9 billion 10-year bond offer at a record low 2% interest rate.

Although French President Sarkozy agreed to amend the EU’s treaty to allow intrusive powers to alter national budgets in Euro zone countries that are in danger, Merkel has continued in her stance that the treaty prohibits the independent European Central Bank from acting as the lender of last resort for the purchasing of government bonds.

Economists have stated that it is improbable that Euro zone could endure the debt crisis in its current state.

Italian Bond Auction Highlights Lack Of Confidence In New Government

A Treasury bill auction in Italy served to shine a light on investor’s lack of confidence in the newly elected government, and the broader fear that the debt crisis in Europe can not be contained.  The yield on the Italian 6-month T-bill was up 3.35% from a similar auction in October to come in at 6.5%.  Traders watching the bond auction closely expected the yield to be between 6.3% and 6.4%.

Italy managed to place the entire amount of $13.3 billion it has targeted for the sale.  Experts said the the ECB had stepped in the market, purchasing Spanish and Italian bonds in an effort to curtail skyrocketing yields.  There was also a rise in credit default swaps on Belgian and Italian debt, which indicates a growing uneasiness in the market.

Italian government officials cited the need for growth generation through structural reforms, and stated that the economic problems in the Euro zone today are the fault of the past year’s budget policies.  Structural changes to the economy in Italy, and the European Union as a whole will be needed to enact lasting change, and stem the contagion in the region.

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