Corporate Finance, Essay Example

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Essay

The effect of the Eurozone crisis saw Treasury bonds in the US fall this week. This being a result of the fears that there is no remedial solution to the euro-zones sovereign debt crisis.  Additional new debt is also hurting the bond prices.  In addition the Treasury showed in recent trades that that the 10 year note was 9/32 lower and yielded 1.647%. Bond prices being seen to move inversely according to their yields.

The initial panic started with countries like Ireland, Portugal and Greece requiring bailouts.  This consolidated with the potential threat of Greece pulling out of the Euro-zone and then the hint that Spain, Italy and Cyprus would also require bailouts. The largest economy in the Eurozone being Germany has softened its position on the purchase of Spanish and Italian bonds. It is felt that if the EU officials fail to deliver on market expectations then many unhappy investors will sell off risky assets and shelter in Treasury Bonds.

Min Zeng of the Wall Street Journal reported that that the 10 year note yield had increased from the record low of 1.437% ( set 1st June)  and that even higher yields may be expected given the worry and uncertainty in the direction that the euro-zone crisis is moving in; this combined with the current US economic outlook.  It has been indicated that the 10 year yield is likely to show a trading pattern of between 1.55% to 1.75% . (Zeng, M. 2012)

The EU summit will be seen to have a major influence and be a strong driver in terms of influencing the markets.  Further speculation about additional measures to shore up investor confidence may see investors pulling out of Treasury bonds and into the more risky assets like stocks.

The Federal Government may decide to extend its ‘operation twist’  by adding additional stimulus to the market thereby giving bond prices a boost.

Works Cited

Zeng, M. (2012). US Treasury Bonds slip on hopes of solution for eurozone. Wall Street Journal, 1-2.

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