Bonds: Primary dealers reign in horns at latest US Treasury sale

These were the movements in some of the most widely followed longer-term sovereign bond yields:

US: 2.24% (-3bp)

UK: 2.0% (+3bp)

Germany: 0.68% (+5bp)

France: 0.98% (+1bp)

Italy: 1.85% (-2bp)

Portugal: 2.43% (+3bp)

Spain: 1.83% (-3bp)

Japan: 0.46% (+4bp)

Greece: 10.88% (+6bp)

Sovereign bond markets stabilised late in the afternoon as market observers continued to debate to what extent fundamental triggers were to blame for the volatility across asset classes – especially in public debt markets – or if reduced liquidity conditions and overcrowded trades were the chief cause.

To take note of, reports that the European Central Bank had decided to increase its funding for Greek banks under its Emergency Liquidity Assistance (ELA) facility also seemed to buoy debt markets.

In parallel, Bloomberg reported that in April Treasury volumes at Wall Street’s biggest bond dealers just had their worst April in six years.

Indeed, early in the evening traders pointed out how the US Treasury’s latest three-year debt auction was met with the highest demand from indirect bidders - often foreign central banks – since 2009. However, primary dealers made off with the smallest lot of the notes on offer since May 2010.

CMC Markets analyst Jasper Lawler weighed in with the following observation: “The sell-off in bonds might lead to asset re-allocation to stocks and boost stock markets.”

Lawler further pointed out how German bund yields had been rising faster than those for US treasuries, thus closing the interest-rate advantage of US debt over European debt. That, he surmised, was behind the bounce in the single currency.

William Meadon, a London-based fund manager at JPMorgan Asset Management, seemed to agree. Meadon explained to Bloomberg News how “in a yield-hungry world where some bonds are yielding negative, the FTSE 100 -- an international index that’s yielding almost 4% - looks pretty attractive.”

Regarding the short-term outlook for sovereign bonds, Danske Bank believed there was a limit to how high yields could go, especially in Europe. “We do not believe that the fundamental picture has changed as much as the move higher in yields might indicate,” the broker said.

In the very short-term, Eurozone yields were expected to stabilise around Tuesday’s levels over the next three to six months.

Nonetheless, on a 12-month horizon Danske did see upside for euro area government bond yields as the US Federal Reserve began raising rates.