Saturday, June 18, 2011

Bunds Tumble Tracking Weak Treasurys

LONDON–Safe-haven German bund prices tumbled and the 10-year bund yield climbed above 3% on Wednesday, tracking a sharp sell-off in U.S. Treasurys as investors began to consider the fiscal implications of a U.S. plan to extend tax cuts across the board by two years.

The March bund futures contract fell more than half a point and the benchmark 10-year bund yield rose to levels not seen since late April, with U.K. government bonds also bearing the brunt of a sell-off across core government bonds.

At 0903 GMT, March bunds were down 0.61 at 124.40 while the March gilt contract was down 0.49 at 118.30. The 10-year bund yield climbed nearly 0.07 percentage point on the day to reach 0.0301%.

Treasurys continued to sink Wednesday, extending the previous session’s rout that was triggered by an agreement reached Monday between U.S. President Barack Obama and congressional Republicans to temporarily extend Bush-era tax cuts, including those for top earners, for the next two years in exchange for a 13-month extension of expired jobless benefits.

The measures are expected to help lift economic growth, typically a negative scenario for fixed income securities, while also fueling speculation that the U.S. will have to sell more debt to fund the resulting shortfall in tax receipts.

“The tax accord and other stimulatory measures recently passed appear to have pushed the market into factoring in greater growth,” interest rate strategists at Credit Agricole said in a note.

“A fiscal-led growth means that monetary policy has to do less and thus there are two effects hitting the long-end USTs—more potential supply and a reduction of quantitative easing expectations,” they said.

The market’s nervousness was reflected in a poor auction of three-year Treasury notes overnight, that saw the weakest demand since February 2009, hardly reassuring ahead of a $21 billion sale of 10-year notes later Wednesday.

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