Bond Yields Likely to Remain High regardless of Euro Debt Deal

9 December 2011 (PLANSPONSOREurope.com) - Bond yields are likely to remain high for the immediate future, regardless of today’s agreement on short-term action to tackle the Eurozone’s debt crisis, according to Dan Morris, Global Strategist at J.P. Morgan Asset Management.

At the first working session of the European Council today, 23 of the EU’s 27 leaders reached an agreement on short-term action to overcome the debt crisis and on a new fiscal compact for the euro area. Up to €200bn will be made available to the IMF. The European Financial Stability Facility (EFSF) leverage will be "rapidly deployed", while the European Stability Mechanism (ESM) should come into force in July 2012.

The move comes on a day in which Stefan Angele, head of investment management, Swiss & Global Asset Management, warned that the path to restore competitiveness and stabilise public finances in Italy will be long, while the country will need help to do so.

And despite the deal Morris told PLANSPONSOR Europe investors are likely to take a ‘wait and see’ approach: “In general it is probably less important in terms of what the agreement might be at this point because anything that is agreed probably won’t be implemented for quite a while. What is probably more important for investors is the reaction of the ECB [European Central Bank] because they are the ones that will have immediate impact on the markets more than this is going to.

“So far the measures that they put through yesterday to help the banks are already a first step but ultimately what is going to bring down the yields for sovereign debt is going to be progress on the part of countries themselves. If Italy and Spain in particular don’t continue with their austerity programs it is not really going to matter.

“I don’t know if anyone expected anything too dramatic anyway knowing the difficulties in trying to get an agreement with so many people. We know that the ECB has been relatively reticent to step up its own buying of sovereign debt so the potential for huge benefit of the seminar was limited. I think yields are going to stay high probably for a while as investors wait to see what progress is made in Italy and Spain – if that’s good progress then yields will start coming down.”