SCOREBOARD: Bond sequel

European stocks took a beating after Spain's debt auction, while weak US data kept a lid on Wall Street.

Well, Spain's bond auction went well enough and that was with some tough competition from the French. All up $13 billion of bonds were sold and I believe two of that was from Espańa (two and 10-years). As for the yields paid, they were higher of course but not drastically so. So on the 10-years they went out at 5.74 per cent compared to 5.4 per cent in January with the auction 2.4-times oversubscribed – very healthy demand indeed. So far then, Spain has issued about $43 billion in debt which is half their need for the year. The French 10-year went out at 1.83 per cent, up from 1.78 per cent in March.

That said the mood was decidedly grim as a self-fulfilling panic develops over Spain and Italy. It hasn't developed I guess but it is growing. In the secondary market for instance, Spanish bond yields shot higher and the 10-year is now up to 5.93 per cent from 5.82 per cent. Italian 10-years rose to 5.61 from 5.48 per cent. Equities then all sold off, belted in France and Spain (down 2 per cent and 2.4 per cent respectively), while in Germany, the Dax was 0.9 per cent lower and the FTSE was flat (down 0.1 per cent).

The cause? Initially it was all the news flow about how Italy's debt servicing will rise to 5.3 per cent in 2012 from 4.9 per cent and there is also talk around that the ratings agencies are set for another round of downgrades. This in of itself, probably isn't a surprise. The surprise obviously is that the ratings agencies are still in business and that anything they say is news. They do help keep the fear alive, I guess and fear, as we know, helps keep treasury yields low. So they are good for something then, if not ratings.

But – outside of that even US data out last night wasn't its usual crash-hot self. The US housing market we know is still in the doldrums and existing home sales fell 2.6 per cent in March to 4.48 million (average is 5.37 million) according to data out last night. More generally, sales are on an uptrend and from a low last year, sales are about 1 million higher. But the pace of improvement is glacial, which let's be frank, isn't a bad thing. It was only five years ago we were seeing the biggest boom in history, after all. But it was bad news, as was the lift in jobless claims. They actually fell 2000 to 386,000 in the week to April 14, but there was an 8,000 upgrade to the previous weeks numbers, so they are 6000 higher than one would have thought. By itself nothing to freak out over given that claims were up around the 670,000 at the peak of the crisis – but it just added to the tone.

So US stocks also took a dip, pretty much from the open, maintaining that trajectory before a modest retracement into the close. At that point, the S&P500 was down 0.6 per cent (1376) with tech, industrials and consumer goods the key underperformers and that's with better-than-expected earnings from Microsoft. Thus far I think about 16 per cent of firms have reported, with 84 per cent of those posting positive earnings surprises. The Dow for its part was off 0.5 per cent, to 12964, the Nasdaq fell 0.8 per cent (3007), while the SPI was flat (down 0.09 per cent to 4368).

In the debt space it looks like investors in the US are buying up inflation protection at a rate of knots, which as Ben Bernanke will tell them is just crazy, as there is no inflation. There is nothing to see here people. Prices are not rising, they are falling (shhhh, prices are up 2.7 per cent year-on-year so far – keep it a secret). Anyways, the US Treasury sold $16 billion of 5-year inflation protection at a yield of -1.08 per cent. So investors are taking a negative return, they are willing to pay the US in order to protect against Bernanke's policies – the 'Bernanke hedge'. Break-even inflation rates on the 5-year/5-year forward rate – which are used as a gauge of market inflation expectations – are 2.67 per cent which is above the Fed's preferred range and that's while the economy is supposedly weak – hurtling toward a double dip recession! Shhhh.

For the major T-notes, yields were generally lower and the yield on the 10-year was down 2 basis points (from 1630 AEDT) to 1.98 per cent. The 5-year in turn was off just under a basis point to 0.84 per cent and the 2-year was little changed at 0.266 per cent. Aussie futures were then up 3 ticks on the 3s (96.82) and 1 tick on the 10s (96.24).

Finally for the price action there wasn't much to speak of in forex, the major currencies little changed with the Australian dollar at 1.0334, the euro at 1.3135, sterling at 1.6054 and the yen at 81.65. Commodities too did little and gold is at $1642 (up smalls), WTI at $102.6, Brent at $118.

That's pretty much it. The remaining data was minor and so the Philly Fed index slipped to 8.5 in April (average 4.3) from 12.5, although using similar weights as the ISM the index actually rose and, importantly, the employment component surged.

Today we get trade prices for Australia (1130 AEDT), producer prices for Germany this afternoon, followed by the well respected IFO survey. After that we see UK retail sales and Canadian CPI. The US has no major data.

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