Monthly Bulletin July 2009 - Banque de France

2.4 BOND MARKETS
In June 2009 long-term government bond yields declined in the euro area, while in the United
States an initial strong increase was partly reversed in the second half of the month. Renewed
downward pressure on yields was associated with some dampening of market sentiment globally.
Long-term real yields and long-term break-even infl ation rates in the euro area also declined.
Implied bond market volatility remained broadly unchanged on both sides of the Atlantic.
Between end-May and 1 July government bond yields decreased by around 20 basis points in the
euro area, while they increased overall by around 10 basis points in the United States. On 1 July
ten-year government bond yields stood at around 3.8% in the euro area and at around 3.6% in the
United States (see Chart 11). Accordingly, the ten-year nominal interest rate differential
between US and euro area government bonds narrowed to around -25 basis points. In Japan,
ten-year government bond yields declined by 15 basis points to around 1.3% at the end of the
review period. In June bond market volatility on both sides of the Atlantic remained broadly
unchanged at levels below those observed at the end of 2008 and beginning of 2009, but still above
pre-crisis averages.
In the United States, long-term government bond yields first continued to increase at the beginning
of June, by about 50 basis points compared with the end of May, to a seven-month high of 4% on
10 June. In the second half of June this increase was partly reversed, with bond yields falling to
3.6% by the end of the review period. The strong surge in yields at the beginning of June seemed
to reflect a combination of factors, including a
continued reversal of previous flight-to-safety
flows and somewhat strengthened optimism
about the economic outlook, but also the strong
increase in longer-term Treasury issuance and
concerns about the sustainability of the rising
public debt. The subsequent decline of US
government bond yields in the second half of
June seems to be related to the release of some
mixed and partly worse than expected economic
data affecting the US and global economic
outlook. This triggered some renewed portfolio
shifts to safe haven assets, which is also reflected
in the recent swings in equity prices.
Long-term bond yields in the euro area
declined over the period under review, but also
exhibited some significant intra-period swings.
Ten-year government bond yields first increased
to 4.1% in early June before declining by
around 30 basis points by the end of the review
period. For most euro area countries, the spread
of their government bonds vis-à-vis their
German counterpart remained broadly stable at
still relatively elevated levels, but significantly
below the high levels observed during the first
26 ECB
Monthly Bulletin
July 2009
Chart 11 Long-term government bond yields
(percentages per annum; daily data)
5.00
4.50
4.00
3.50
3.00
2.50
2.00
July
euro area (left-hand scale)
United States (left-hand scale)
Japan (right-hand scale)
Sep. Nov. Jan. Mar. May
2008 2009
4.00
3.50
3.00
2.50
2.00
1.50
1.00
July
Sources: Bloomberg and Reuters.
Note: Long-term government bond yields refer to ten-year bonds
or to the closest available bond maturity.