Global markets nervously looking at U.S. bond prices

By Pan Pylas

Associated Press

Published: Wednesday, Dec. 8 2010 8:17 p.m. MST

Specialist Patrick Murphy, foreground left, directs trading in shares of Citigroup at the close of trading on the floor of the New York Stock Exchange, Tuesday, Dec. 7, 2010.

Associated Press

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LONDON — Stocks in Europe and the U.S. traded in narrow ranges Wednesday as bond market investors fretted about Europe's debt crisis and, increasingly, over the scale of U.S. borrowing following President Barack Obama's agreement with the Republicans to extend tax cuts for all Americans.

In Europe, the FTSE 100 index of leading British shares closed down 13.92 points, or 0.2 percent, at 5,794.53, while Germany's DAX fell 26.04 points, or 0.4 percent, to 6,975.87. The CAC-40 in France ended 21.48 points, or 0.6 percent, higher at 3,831.98.

In the U.S., the Dow Jones industrial average closed at 11,372.48, up 13.32, while the broader Standard & Poor's 500 index rose 4.53 points to 1,228.28.

More dramatic developments are being seen in the dollar and in U.S. government bonds following Obama's tax cuts compromise.

The worry in the markets, echoed by credit ratings agency Moody's Investor Services, is that the tax-cut extension could add around $4 trillion to the U.S. deficit over the coming 10 years compared to the scenario on which the Obama administration had based its projections.

Bond investors are worried there is no credible plan to get a grip on the U.S.'s own problems, especially as the pillars of the U.S. government are split.

"The world in which investors took solace in lowly yields on account of sovereign debt crises in the eurozone and fears over the health of global recovery has suddenly changed after agreement to keep tax cuts in place," said Andrew Wilkinson, senior market analyst at Interactive Brokers.

By late afternoon London time, the euro was trading 0.4 percent lower at $1.3226, while the dollar was 0.8 percent firmer at 84.22 yen.

Developments in the bond markets over the last couple of days have highlighted that debt levels are historically high all around the world after governments loosened the purse strings to deal with the global financial crisis and the ensuing recession.

"It has been convenient and justifiable for Greece and Ireland to attract most of the adverse publicity emanating from the sovereign bond crisis," said David Buik, markets analyst at BGC Partners. "However, no one should be under any illusions that every government in the world, with the exception perhaps of China and Germany, is over-borrowed including the U.S."

As the U.S. deficit comes into focus, there's been an easing in the bond markets of the more highly indebted countries in Europe following indications that the European Central Bank is taking a more active role in the crisis, through bigger purchases of government bonds.

So far, the ECB's bond buying appears to be doing the trick — buying bonds supports their prices, taking pressure off the banks that hold them. It also lowers bond yields, which indicate the borrowing costs countries would face were they to go into the market for more credit.

Portugal is one country that will be breathing a huge sigh of relief as the yield on its ten-year bonds has slid below 6 percent from just above 7 percent a week ago, while Ireland's government will be comforted that the passage of its budget Tuesday, which includes ?6 billion of austerity measures, has pushed Irish bond yields down by 0.13 percentage point to 7.83 percent.

However, Europe's debt crisis has not magically gone away and there's been mild disappointment in the markets that two days of discussions between Europe's finance ministers in Brussels did not yield much more than a commitment to make bank stress tests more rigorous and comprehensive.

Investors are also keeping a close watch on developments in China, amid mounting market talk that the country's monetary authorities are planning to raise interest rates soon — possibly this weekend — in an attempt to rein in inflationary pressures and cool a property-related credit boom.

Given that backdrop, it's unsurprising that Chinese shares dropped. The benchmark Shanghai Composite Index lost 1 percent to 2,848.55 while the Shenzhen Composite Index for China's smaller, second market dropped 0.3 percent to 1,305.25.

Elsewhere, South Korea's Kospi slipped 0.4 percent to 1,955.72 and Hong Kong's Hang Seng lost 1.4 percent to 23,092.52.

Japan's Nikkei 225 stock average bucked the trend, adding 91.23, or 0.9 percent, to 10,232.33 as the yen continued to weaken against the dollar to the relief of the country's exporters.

Oil prices slipped slightly after hitting a two-year high on Tuesday.

Benchmark crude for January delivery was down 51 cents at $88.18 a barrel in electronic trading on the New York Mercantile Exchange. The contract hit $90.76 on Tuesday, the highest price since Oct. 8, 2008.

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