Saturday, November 05, 2011

Europe’s Debt Crisis Causes Fluctuations in U.S. Treasury Bonds

The twists and turns of the ongoing European debt crisis, coupled with the knowledge that its outcome will have considerable implications for economies worldwide, has had a direct impact on American financial markets. When hopes of a deal are high, and one appears close, the U.S. stock market rises in approval. Conversely, whenever the situation starts to looks especially bleak, the stock market responds with an accompanying fall.

The same has been true of U.S. Treasury bonds. Whenever Europe appears hopeless and the stock market is down, Treasury bonds serve as a haven for worried investors and rise accordingly. This process was on full display this past week: after a meeting of European finance ministers was cancelled, speculation swirled that the major leaders in the Euro zone were not on the same page. As a result, bond prices immediately responded and began to trade higher. The 10 year note went 1 2/32 higher to a yield of 2.111%, while the 30 year bond jumped 3 1/32 to yield 3.13%. The two year note had a more moderate 2/32 rise to 0.255%.

When the European crisis hasn’t been hitting the news, Treasury bonds have actually trended downward in recent weeks alongside reports of an improving U.S. economy. With rises in job and consumer confidence data, the stock market showed signs of health at the expense of Treasury bond yields. But these improvements are still being stymied by an overall lack of investor confidence, and analysts predict that Treasury bonds will continue fluctuating until the European crisis is resolved.

At the core of the European debt crisis is the dire financial straits of the Greek government. Europe has already given Greece one bailout, and now it looks that the country is going to need another. But there are other problems as well: the Portuguese and Italian economies are also greatly struggling, European banks are burdened by national debt, and some countries are questioning their membership in the Euro zone in the first place.

As is often the case, politics has played a role in the negotiations. Although Germany and France – the two most important economies in the talks – have put their weight behind a plan that sets up emergency funds, supports the Italian economy, and restructures the Greek debt, there are many small points of disagreement and countries that are unwilling to go along. In Italy, Prime Minister Silvio Berlusconi is mired in a political struggle and has refused to make the commitments that Germany and France seek.

The outcome of the European crisis, then, is still to be determined. All we can say at this point is that U.S. Treasury bonds will continue to fluctuate alongside the roller-coaster negotiations.

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