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    Negative European Yields Punish Euro

    German yields tumbled to their lowest on record pummeled by fears of a British exit from the European Union, the ECB's bond buying program, worries over weak economic growth and the perceived inability of the Federal Reserve to carry through its rate normalization. 

    The return on the generic German 10-year Bund dropped as low as 0.023 percent in European trading before closing slightly higher at 0.033 percent down 2 basis points on the day.

    Average yields on German government debt are negative out to 10 years. Even the 30-year Bund is paying just 0.6 percent. Across the globe over 10 trillion dollars’ worth of sovereign debt has a negative yield. 

    The euro  tracked German rates rate lower despite a similar 3 point fall in the yield on the 10-year Treasury to 1.6730 percent (1:10 pm), its lowest in almost four months.

    After starting in Asia at just over 1.1400, the euro saw selling pressure accelerate as it crossed below 1.1380 and the 10-year Bund yield fall below 0.45 percent. The united currency pair touched its weekly low at 1.1305 several times before rebounding to 1.1335. 

    The British national referendum whether to remain a member of the European Union on June 23rd is roiling markets worldwide. In recent polls the vote to leave the continental union, which Britain joined in 1973 has gained, and appears to be at par or slightly ahead of those who which to remain.

    The economic and financial consequences of a U.K. withdrawal from the organization are largely unknown but the certain period of turmoil  that will follow is unsettling financial markets and creating demand for  safe assets,  prime among them government debt of all types. 

    The European Central Bank expanded its bond buying program to commercial paper yesterday, making its first purchases. The ECB hopes that lower rates and the additional liquidity will spur economic activity in the 28 member currency union despite limited success from similar earlier programs.

    Gross national product in the monetary union expanded just 1.6 percent in 2015. That is predicted by the IMF to rise to 1.7 percent this year, but remained below 2 percent for the rest of the decade.

    The only major central bank in the world possessed of an economy thought strong enough to move rates off the zero bound had been the Federal Reserve and the United States.

    Starting last December with its first increase in the fed funds rate in almost a decade, the Fed had then projected 4 hikes this year to 1.25 percent by December.  But a collapse in global equity markets in January and February, caused at least partially by the prospect of a rising rate cycle, derailed Fed plans.  

    Just two weeks ago, several Fed governors and Chair Yellen seemed to indicate that the possibility of a second hike at the June meeting next week was high.

    Then came last Friday's shockingly weak payroll report and the June hike vanished.

    The futures markets today put the odds of a June increase at just 4.8 percent and only 21.2 percent for July. Not until the December 14th meeting do they rise to better than even at 54.0 percent.

    After several months of relative calm and rising prices in global financial markets, uncertainty and danger are again on the rise.  The risks are considerably larger and the margin for error less in Europe than the United States. Bond yields and the euro tell the tale. 


    Joseph Trevisani

    Chief Market Strategist

    WorldWideMarkets Online Trading

    Charts: Bloomberg



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