The big bond sell-off

May 12: Demand for debt is weakening around the world this morning, and Greece is back from the brink. Plus, sub-prime charges and a company visit to Paris.

Greece is back from the brink so far this morning, after the country ordered its treasury to pay a bill due to the IMF for 750 million euros, and yields are suddenly surging around the world.

It’s been rocky for Greece the last couple days, as negotiations have yet to see hard, headline progress, and worries about Greece’s ability to pay another bill (and only one of many bills to come) to the IMF without its bailout money in hand.

There’s lots in the news today: yesterday, the American government approved Royal Dutch Shell’s plans to drill for oil in the Arctic, off the coast of Alaska, and a chief of the Lax Kw’alaams in B.C. says the tribes will refuse an offer for a $1-billion deal with the Malaysian state oil company for an LNG project in the region.

Today will bring budgets from Australia and from Norway, as both countries weight the budget fallout from falling oil and mineral revenues. The main Aussie index is rallying today in the lead-up to the budget, which will be presented in the evening, Sydney time. In the eurozone, finance ministers are still meeting, but it’s generally a quiet day for economic data. There are some big earnings reports today, however, including Air Canada, Rona, and mining and energy companies including Ivanhoe, Encana and Athabasca.

A big sovereign debt sell-off. Bond yields are rising sharply for another day in Europe this morning, rolling off a hike in yields from the U.S. during trading yesterday. Yields move inversely to prices, so when yields rise, this is a sign that there’s less demand for the debt itself, and prices fall. The sell-off has been on for a few days now, and it’s a telling reversal given that just last month German debt, in particular, was sinking further and further into providing negative return for holding German debt: the yield on a 10-year bund was as low as 0.07 per cent, with which inflation offers far below zero for long-term debt, and it’s now popped back up to 0.727 per cent. Those low yields were driven by investors looking for a safe haven in a bumpy economic picture, as Greece bailout negotiations caused hand-wringing, and the European Central Bank’s massive bond-buying program (quantitative easing) suggested demand would only rise. The sell-off of debt is not just in Europe: American treasury bills are at their highest yields since December, while bonds in the emerging markets and Australia are also up so far this morning. So what’s changed? One factor is a sell-off of debt by the U.S. government, with more to come, but another factor might be a slight return to normal, as the eurozone economy has picked up slightly and demand coming off the ECB’s announcement wears off.

Fines and charges for selling subprime mortgages. By now, we have a pretty good idea what happened in the lead-up to the financial crash: banks took bad mortgages, chopped them up, and sold them on as if they were perfectly good. Was the lawbreaking widespread, the fraud pervasive, the corner-cutting endemic? The latest charges certainly swing to that side of the argument, after a federal judge charged the Royal Bank of Scotland and Nomura, a Japanese bank, with misleading the federal mortgage lenders. “The magnitude of falsity, conservatively measured, is enormous,” she was quoted in the New York Times. Damages could be as much as $500 million, but it’s just one small piece of fines against banks for the crash. RBS and Nomura were the only two banks of 18 to go public, the rest choosing to settle out of court and pay a total of $18 billion in fines. One of those banks was Goldman Sachs, which was facing another fine in Australia yesterday in connection with its sale of mortgages. The bank was ordered to pay the National Australia Bank $80 million.

The underwhelming exporter. The Bank of Canada has touted Canada’s manufacturing exports as a patch-over for the impact the oil rout is having on the economy at large, but Jason Kirby breaks down the optimism in his latest column for Maclean’s, including this key detail: after the U.S., our second largest market for energy exports is… Italy.

A Chinese company in Paris. The head of a Chinese conglomerate brought more than 6,000 employees on holiday to France and Monaco, and they virtually took over Paris. The numbers are impressive – the trip required 84 airplanes and 140 hotels, according to the Times, and included forming words visible from the sky while wearing matching blue outfits. The company, Tiens Group, is run by the billionaire Li Jinyuan, and is best known as a pharmaceutical company where employees work entirely on commission.

Need to know:
TSX: 15,152.64 (-17.38), Monday
Loonie: 82.58 (-0.13), Monday
Oil (WTI): $60.35, Tuesday (8 a.m.)

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