Bond yields tumble in Europe as crisis fears ease

Europe continued to pull back from the brink Thursday as government bond yields fell for a fourth day in France, Italy, Spain and other countries.

The drop in yields followed a move by six major world central banks on Wednesday to pump more money into the global financial system, a strategy aimed particularly at assisting cash-strapped European banks.

Bond buyers also got gutsier as European Central Bank President Mario Draghi hinted that the ECB could take more aggressive action to help ease the continent’s debt crisis -- if countries pledge to keep spending in check.

The ECB has been under enormous pressure to boost its purchases of Eurozone bonds as a way to push yields down, after many investors abandoned the debt market in recent months amid fears of a wave of sovereign defaults.

But investors showed a renewed appetite for European debt Thursday as France and Spain successfully sold new bonds.

In debt trading, the market yield on two-year French bonds slid to 1.13%, down from 1.29% on Wednesday and a recent high of 1.90% a week ago.

Spanish two-year bond yields tumbled to 4.78% from 5.37% on Wednesday and 6.09% a week ago.

The euro currency continued to edge up, rising 0.2% to $1.347. The euro hit an eight-week low of $1.324 last week.

European stock markets ended modestly lower after Wednesday’s big gains. The German market fell 0.9% after surging 5% on Wednesday. The French market eased 0.8%, Italian stocks slipped 0.2% and the Spanish market was off 0.3%.

Wall Street was largely flat at about 11:30 a.m. PST. The Dow Jones industrial average was off 13 points to 12,031 after rocketing 490 points, or 4.2% in Wednesday’s global rally.

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Fed says it takes no risk in lending dollars for Europe

Stocks soared Wednesday as global markets lauded central banks’ decision to funnel more money into the financial system, a move mainly aimed at assisting struggling European banks.

But the agreement to expand so-called currency liquidity swap arrangements among the Federal Reserve, the European Central Bank and four other central banks could be viewed another way: an act of desperation.

“It suggests that policymakers’ concerns about the outlook are significant and have increased substantially,” economists at Nomura Securities International wrote in a report.

For its part, the Fed insisted that it's taking no real risk under the program.

Europe is the epicenter of global financial worries, of course. Soaring market interest rates on government bonds across the continent over the last month have further weakened European banks. That’s because their bond holdings have dropped in value with each rise in rates.

In shades of 2008, fear of a new round of bank failures has made lenders worldwide increasingly reluctant to do business with European banks. That has made it more difficult for some banks to get the dollars they need to repay their own debts -- for example, when a U.S. money market fund calls in a loan it previously made to a European bank.

To avert a new global credit squeeze, the Fed agreed to make more dollars available to the ECB and other central banks, and to cut the interest rate for such loans. That, in turn, will allow the ECB to lower the cost of dollars it lends to individual commercial banks.

The Fed noted on its website that it lends only to other central banks under these arrangements, and that the borrowing central bank “therefore bears the credit risk associated with the loans.”

In other words, the Fed isn’t on the hook if the ECB’s dollar loans to individual banks go bust.

The Fed also said it doesn’t bear any risk of currency loss on the loans, if for example the euro’s value were to fall against the dollar. (The euro rose Wednesday, gaining 1% to $1.345.)

The swap program doesn’t attack the most pressing problem in Europe, which is the surge in government bond yields. The central banks aren’t directly funneling money to cash-strapped European governments.

“These actions do not address solvency issues in European sovereigns,” analysts at Keefe Bruyette & Woods wrote in a note to clients.

Still, bond yields fell across most of Europe on Wednesday. The yield on two-year French bonds slid to 1.29% from 1.58% on Tuesday. Italian two-year bond yields eased to 6.93% from 7.10%, the third straight drop after reaching a euro-era high of 7.66% on Friday.

Despite the Fed’s assurances, one of the central bank’s harshest critics -- Rep. Ron Paul (R-Texas) --  attacked the swap agreements.

“Rather than calming markets, these arrangements should indicate just how frightened governments around the world are about the European financial crisis,” Paul said in a statement.

“The Fed is behaving much as it did during the 2008 financial crisis, only this time instead of bailing out politically well-connected too-big-to-fail firms it is bailing out profligate government spending” in Europe,  Paul said.

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A third straight annual gain for stocks? Just maybe . . .

Wednesday's big rally on Wall Street puts the stock market back within striking distance of posting a gain for 2011 -- if the bulls can stay in control in December.

That's a big "if," of course, given the still-dangerous situation in Europe.

But the U.S. market’s relative resilience in November, compared with most foreign markets, hinted that many investors were reluctant to bail out of American equities despite Europe's woes.

Looking solely at U.S. economic data for the month, stock investors had a decent reason to stay put: Most of the reports showed the recovery continuing, although at a modest pace.

That was reinforced by data Wednesday on Chicago-area manufacturing, private-sector payroll growth and the Federal Reserve’s latest “beige book” report on U.S. economic conditions.

Those reports, along with the Fed’s surprise move with other major central banks to try to bolster Europe’s struggling banking system, drove the Dow Jones industrial average up 490 points, or 4.2%, to 12,045.68.

That lifted the Dow back into the black for 2011. The 30-stock index is up 4% for the year as November ends.

But most broader indexes still are in the red. The Standard & Poor’s 500 is down 0.8% for the year. The Nasdaq composite is down 1.2%, and the Russell 2,000 small-stock index is off 5.9%.

If the market continues to advance it could put more pressure on hedge fund managers and other big-money players to hop aboard, hoping to salvage their performance for 2011. They also know that December historically has been a good month for the market.

Just by the math, U.S. stocks should have an easier time finishing the year with gains compared with most foreign markets.

The average European blue-chip stock is down 16.6% this year. The Japanese market is down 17.5%, Brazilian stocks are off 17.9% and the Canadian market is down 9.2%.

If Wall Street can rally in December, major stock indexes could post their third-straight annual gain.

The Dow industrials rose 11% in 2010 after an 18.8% jump in 2009. Those gains followed the 33.8% crash in 2008.

The S&P 500 index was up 12.8% last year after a 23.4% advance in 2009. The S&P plunged 38.5% in 2008.

The Russell 2,000 index will have a harder time getting close to its gains of 2009 and 2010. It was up 25% in both of those years after tumbling 34.8% in 2008.

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Americans feel more confident, but should they?

The U.S. stock market struggled again this month while Europe careened toward a financial meltdown, but many Americans don’t seem to be paying attention to either: Consumer confidence snapped back in November to the highest level since July.

The Conference Board said its confidence index jumped to 56.0 after slumping to 40.9 in October, which was the lowest level since the depths of the recession in early 2009.

A reading of 56.0 still is very depressed, and is down from the 2011 high of 72.0 reached in February. A typical reading in the mid-2000s was between 100 and 110.

Nonetheless, any increase in confidence is a good thing. And the board's report showed that confidence rose this month among all income groups, so it wasn't just the well-heeled who turned more upbeat.

But should people really be feeling better about things?

Maybe it’s just a coincidence, but many of the U.S. economic reports over the last month have shown improvement, further belying the idea that the economy was at risk of sliding back into recession.

Eighteen of 24 reports measuring economic output, employment and the housing sector were better this month than the previous readings, according to data firm Bespoke Investment Group. That’s a pretty good batting average.

Another way to gauge the economic reports is to look at whether the data came in above or below analysts’ expectations. Over the last 50 trading days, the number of better-than-expected reports has exceeded worse-than-expected reports by 13, according to Bespoke.

That is “the highest level since April, and represents an environment where economists have been underestimating U.S. economic growth amid all the global issues,” Bespoke said in a report.

Some important data are due later this week: The Institute for Supply Management’s report on November manufacturing activity is coming on Thursday. On Friday the government will report on November employment.

With the U.S. economy showing remarkable resilience by many measures, you have to wonder: Would the stock market be a lot higher if it weren’t for Europe’s unrelenting crisis?

The average New York Stock Exchange issue is down 5.5% so far this month and down 10.2% this year. With a month of trading to go, it would take a gain of 11.5% from this point to put the NYSE index in the black for 2011.

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Europe gets some breathing room as markets rally

European markets pulled back from the brink Monday as government bond yields fell in most Eurozone countries and stocks rebounded.

Investors may simply have been relieved that after days of unrelenting bad news from the continent, the bottom didn’t fall out.

Also, once markets began to rally the turnaround would have put pressure on “short sellers” who had borrowed securities and sold them, betting on further declines. If they were buying to close out their bets, it would have added fuel to the turnaround.

The German, Italian and Spanish stock markets all were up 4.6% for the day. French shares jumped 5.5%. Even Greek stocks managed to gain, adding 0.4%.

Wall Street also snapped back, with the Dow Jones industrials up 291 points, or 2.6%, to 11,523.

For the most part, though, the gains just recouped last week’s losses, which had pushed some Eurozone markets close to their 2011 lows reached in September.

The euro currency rose 0.5% to $1.331 in New York.

It helped that Italy and Belgium were able to sell new bonds Monday, though at pricey levels.

Some investors may be speculating that Eurozone leaders will announce bold new measures this week to contain the debt crisis. Eurozone finance ministers meet Tuesday and European Union finance ministers meet Wednesday.

“Overall, there appears to be a sense of greater urgency among Eurozone leaders after some very worrisome developments last week,” said Kathy Lien, director of currency research at GFT in Jersey City, N.J.

Portugal and Belgium both were hit last week by further cuts in their bond ratings. Early Monday, Moody’s Investors Service warned that the spreading debt crisis was "threatening the credit standing of all European sovereigns."

Bond markets in most major Eurozone countries gave policymakers a little breathing room, as yields eased. The yield on two-year Italian bonds fell to 7.11% after hitting a euro-era high of 7.66% on Friday. Spanish two-year bond yields dropped to 5.75% from 6.09%.

But investors continued to bail out of Portuguese debt, pushing the country’s two-year bond yield to 18.29% from 18.11% on Friday.

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Photo: A stack of 50-euro notes. Credit: Simon Dawson / Bloomberg News

Moody's: Every European nation now at risk on debt

Throwing more logs on the Eurozone fire, Moody's Investors Service said early Monday that the continent’s debt crisis now is "threatening the credit standing of all European sovereigns."

That's a not-so-subtle warning that even Moody’s top-rung Aaa ratings of countries including Germany, France, Austria and the Netherlands could be in jeopardy.

In a report from London, Moody’s painted a despairing picture of the choices European governments face as investors have grown increasingly fearful of buying Eurozone countries’ bonds, thereby driving up market interest rates to prohibitive levels.

The firm said its “central scenario” remains that the euro area will be preserved without widespread bond defaults. But policy moves to keep the Eurozone intact “may only emerge after a series of shocks, which may lead to more countries losing access to market funding for a sustained period and requiring a support program,” Moody’s said.

“This would very likely cause those countries' ratings to be moved into speculative grade,” meaning “junk” quality, it said.

Moody’s currently has junk ratings on bonds of Greece, Ireland and Portugal, all three of which have gotten European Union bailouts in the last 18 months.

In recent weeks, worries have mushroomed that Spain and Italy also will require Eurozone help to avoid defaulting on their debts.

Though it held out hope that the debt crisis could be contained, Moody’s said there was a growing chance of dire scenarios playing out. From a summary of the report:

The probability of multiple defaults ... by euro area countries is no longer negligible. In Moody's view, the longer the liquidity crisis continues, the more rapidly the probability of defaults will continue to rise.

A series of defaults would also significantly increase the likelihood of one or more members not simply defaulting, but also leaving the euro area. Moody's believes that any multiple-exit scenario -- in other words, a fragmentation of the euro -- would have negative repercussions for the credit standing of all euro area and EU sovereigns.

Talk of a Eurozone breakup has become much more widespread in recent days, as Germany and the European Central Bank have continued to oppose bold new steps to provide more financial aid to struggling member countries.

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Stocks in danger of falling through autumn lows

The only encouraging thing to say about global stock markets in recent weeks was that most still were  above their autumn lows.

But after last week's plunge, stocks are much closer to falling through those lows -- which would be another blow to investor psychology.

Hammered in large part by deepening fears of a European financial meltdown and a global recession, most markets plunged in August and September. As worries eased temporarily in October, stocks rebounded, only to dive again this month as Europe's situation has worsened.

The main Spanish stock index sank 6.6% last week to end at 7,763. A further loss of 1.6% would push the index below 7,640, the 2 1/2-year closing low it reached on Sept. 12.

Falling through previous index lows wouldn’t assure a new market plunge, but it would be an obvious red flag to investors who’ve been assuming that the autumn nadirs for stock prices were the worst of it. That could make potential buyers more skittish, wondering where the real bottom is.

The battered French market, down almost 12% in November through Friday, was just 2.6% from its September low. Italian stocks ended Friday down 13% for the month and 3.3% above their September low.

U.S. stocks also are getting closer to their 2011 lows, which for most indexes were reached on Oct. 3. The Dow Jones industrial average, which fell 4.8% last week to end at 11,231.78, is 577 points, or 5.1%, from its Oct. 3 close of 10,655.30.

The broader Standard & Poor’s 500 index also is 5.1% from its October low, while the Nasdaq composite would have to lose another 4.3% to reach a new 2011 low.

A few markets already have reached new 2011 lows: Japan, India and Taiwan did so on Friday.

So too did Greece, the epicenter of Europe’s debt debacle. The Greek market now has lost 88% of its value from late 2007, and there still are few takers: The Athens market is down 18% this month alone.

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Is a Eurozone breakup now inevitable -- and imminent?

Europe enters the new week at a crucial point in its 2-year-old financial crisis, with a growing number of analysts warning that the 17-nation Eurozone is in serious danger of unraveling.

What that would mean, exactly, is in large part unknown, because there is no precedent for it. It’s easy to say that countries such as Greece would go back to using their pre-1999 currencies, but the reality would be devastating on many levels.

For example, Greece’s crushing debt is denominated in euros. If the country went back to using the drachma, the new currency presumably would be worth a fraction of a euro. So Greece’s debt burden would become even bigger. The banks and other investors that own Greek bonds could face a massive wipeout.

Oddly enough, though the euro currency has weakened in recent days, it hasn’t fallen to the depths reached in the global financial meltdown of 2008. The euro dived to $1.245 in November of that year. It ended last week at $1.324, down from a recent high of $1.419 on Oct. 27.

The Economist magazine wondered in a weekend story why the currency market isn’t more worried, and  why the European Central Bank and Germany continue to oppose emergency moves to halt the crisis:

A euro breakup would cause a global bust worse even than the one in 2008-09. The world’s most financially integrated region would be ripped apart by defaults, bank failures and the imposition of capital controls. The euro zone could shatter into different pieces, or a large block in the north and a fragmented south.

Amid the recriminations and broken treaties after the failure of the European Union’s biggest economic project, wild currency swings between those in the core and those in the periphery would almost certainly bring the single market to a shuddering halt. The survival of the EU itself would be in doubt.

The immediate problem is that investors continue to shun European government bonds, driving interest rates up and thereby digging a deeper hole for countries that need to refinance debt.

Markets will be tested early this week as Italy, Belgium and Spain try to issue new bonds. There were reports Sunday of possible new International Monetary Fund aid for Italy.

Last week, the market yield on two-year Italian bonds ended the week at 7.66%, a new euro-era high and up from 6.12% a week earlier and 3.4% in mid-August.

Carl Weinberg, chief economist at High Frequency Economics, warned in a report Sunday that some European banks are nearing the breaking point as their bond holdings plunge in value, erasing capital from their balance sheets.

“We believe the endgame is now in sight, with bank failures likely at year-end, or perhaps sooner,” Weinberg said. “We worry about a credit crunch strangling the economy of the Eurozone: Banks with capital deficiencies do not write loans.”

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Portugal, Belgium hit by rating cuts; Eurozone yields jump again

With European government bond markets already in severe distress, the credit-rating companies keep delivering their equivalent of a blast of pepper spray.

Bond yields surged again across Europe on Friday, one day after Fitch Ratings cut Portugal’s debt rating to “junk” status, meaning below investment-grade.

After markets closed, Standard & Poor’s dealt yet another blow to Eurozone debt, cutting Belgium’s rating to AA from AA+.  S&P cited growing doubts that Belgium will be able to reduce its debt load as the continent’s economic situation deteriorates.

Meanwhile, Moody’s Investors Service lowered Hungary’s debt rating to junk on Thursday, and Greece reportedly was trying to drive a harder bargain with creditors as it negotiates to have a large portion of its debt forgiven.

All of this made Friday a bad day to try to borrow in the Eurozone, but Italy tried anyway -- and paid a high price. Investors demanded a 6.5% yield on $10.6 billion of six-month Italian treasury bills, up from 3.09% just a month ago.

After Fitch’s downgrade of Portugal, the yield on 10-year Portuguese bonds jumped to 12.64% from 12.21% on Thursday.

Before S&P’s announcement on Belgium, 10-year Belgian bond yields rose to a euro-era high of 5.86% from 5.74% on Thursday. Two months ago the yield was 3.82%.

Investors have been hoping for a major new incentive by European authorities to stop the debt crisis from spreading. But on Thursday, a meeting of German Chancellor Angela Merkel, French President Nicolas Sarkozy and Italian Prime Minister Mario Monti left markets with no reason to expect immediate new help.

Merkel again rejected the idea of Eurozone governments issuing bonds backed by all countries in the currency union, which in effect would make Germany responsible for other nations' debts.

But in a bad sign for Merkel, yields also rose further Friday on German bonds, which until this week had been the one haven left in European debt markets. The 10-year German bond yield ended at 2.26%, up from 2.19% on Thursday and 1.97% a week ago.

European stock markets mostly managed to rebound a bit on Friday after steep losses in recent days. But the euro currency was hammered, falling 0.9% to $1.323. The euro has tumbled from $1.353 a week ago and $1.419 on Oct. 27.

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Eurozone debt crisis worsens as Germany struggles to sell bonds

How could things get worse in Europe? Try this: Now Germany is having trouble finding investors to buy its bonds.

The German treasury could only sell about two-thirds of the $8.1 billion in 10-year bonds it wanted to issue on Wednesday, which sent market yields higher on German debt and across the Eurozone.

It isn’t unheard of for German bond sales to come up short. But at a time like this -- with investors already fleeing bonds of most other Eurozone countries -- the disappointing sale stoked fears that the continent’s debt crisis has reached a dangerous new tipping point.

The market yield on German 10-year bonds soared to a 3 1/2-week high of 2.15% from 1.92% on Tuesday.

Spanish 10-year bond yields rose to a new euro-era high of 6.65% from 6.61% on Tuesday. In France, 10-year bond yields shot up to 3.69% from 3.53%. Belgium was hit particularly hard, with its 10-year yield surging to 5.48% from 5.08% on Tuesday.

Not surprisingly, European stock markets slumped for a third day, sending key indexes closer to their 2 1/2-year lows reached in September. Stocks slid 2.6% in Italy, 2.1% in Spain and 1.4% in Germany.

The euro fell 1.1% to $1.336, its lowest level since Oct. 7.

Wall Street also was dragged lower. The Dow Jones industrial average was off 194 points, or 1.7%, to a six-week low of 11,299 at about 11 a.m. PST. Weak economic data from China also hurt sentiment.

Financial markets have been looking to the European Central Bank to halt the continent’s debt contagion and restore investors’ confidence in buying government bonds. In theory, the ECB could commit to buying unlimited quantities of bonds to try to hold down rates.

But the bank has seemed reluctant to act aggressively, and Germany and France are clashing over how big a role the ECB should play even as the debt debacle has spread from Greece to the heart of Europe.

German Chancellor Angela Merkel continues to oppose a massive bond-buying program by the ECB. She also opposes the idea of Eurozone governments issuing bonds backed by all countries in the currency union, which in effect would make Germany responsible for other nations' debts.

But with German bonds now under pressure, Merkel’s obstinacy risks pushing investor confidence to the point of no return.

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Bond yields rise again in Europe; IMF offers new help

There's a breaking point out there somewhere for Europe's debt crisis, and markets seem intent on finding it.

Investors on Tuesday continued to demand higher yields on government bonds of Spain, Italy, France and Belgium, as the continent’s debt woes deepened.

Greece, the epicenter of the crisis, is almost the least of Europe’s worries now.

Spain had to pay 5.11% to issue three-month government bills, more than twice what it paid a month ago. A leader of Spain’s new governing party called on the rest of the Eurozone to “save and guarantee the solvency” of the country’s debt market, saying that borrowing costs were becoming prohibitive.

The yield on 10-year Spanish bonds rose to a new euro-era high of 6.61% from 6.55% on Monday.

Belgium’s 10-year bond yield surged to 5.08%, up from 4.82% on Monday and the highest since 2008.

The International Monetary Fund, led by France's Christine Lagarde, announced that it would make it easier for struggling countries to tap IMF credit lines. That may help, but it’s also a sign that the situation in Europe is worsening.

Financial markets have been looking to the European Central Bank to halt the contagion. In theory, the ECB could commit to buying unlimited quantities of government bonds to try to hold down rates. But the bank has seemed reluctant to act aggressively, and Germany and France are clashing over how big a role the ECB should play.

German Chancellor Angela Merkel continues to oppose a massive bond-buying program by the ECB. She also opposes the idea of Eurozone governments issuing bonds backed by all countries in the currency union. Merkel wants to put more pressure on cash-strapped governments to get their fiscal houses in order.

But as bond yields continue to rise and Eurozone stock markets continue to sink, the risk is that Merkel could push Europe’s financial system into an abyss.

Stocks fell further Tuesday, with the Italian market down 1.5%, Spanish shares down 1.4% and the French market down 0.8%. The markets are sinking closer to the 2 1/2-year lows reached in September.

The euro currency, however, was steady at $1.351, up slightly from $1.349 on Monday.

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