What’s Up With Rising Sovereign Bond Yields?

U.S. Savings Bonds
U.S. Savings Bonds

What's up with the rising sovereign bond yields? Even stock traders have been talking about this move.

The markets seem to be less worried about an imminent meltdown in the European Union. Ten-year U.S. Treasurys yielded 1.4 percent at the end of July, but are now at 1.8 percent. German 10-year yields are now over 1.5 percent; they were 1.2 percent a few weeks ago. British gilts are near 1.7 percent, up from 1.4 percent. Even Japanese bonds are up!

Of course, all this could quickly reverse with more turmoil in Europe.

I mentioned on Tuesday how amazed I was to see JPMorgan Chase sell $2.5 billion of five-year debt at a 2 percent coupon. That's 135 basis points off of the comparable five-year Treasury.

True, this is one of the best capitalized banks in the world, but still...2 percent for five-year paper? It's part of a tidal wave of corporate issuances — a few weeks earlier International Business Machines priced $1 billion, 10-year bond at 1.875 percent, an even tighter spread than JPMorgan.

The Financial Times reported yesterday that sale of long-term U.S. corporate to date in 2012 surpassed the entire amount sold in 2011: $86.3 billion year to date vs. $84.7 billion in all of 2011. Long-term corporate bonds have returned 9.9 percent this year, the FT reports, much more than the return on comparable Treasurys.

See my “Trader Talk” post yesterday for more on the exchange-traded fund(explain this) activity in bonds and in the growing interest in playing against low volatility.


1) Gold demand weaker in India and China. The weak Indian rupee and an economic slowdown caused a steep drop in demand there, where gold investment and jewelry demand was down 38 percent, according to the quarterly report from the World Gold Council, released this morning. China was down 7 percent. (Read More: Gold Demand Hits Lowest in Over 2 Years: WGC.)

Overall gold demand dropped 7 percent compared to the second quarter 2011.

Jewelry demand: down 15 percent. Investment demand: down 23 percent. ETFs: flat. India and China are about 45 percent of global jewelry and investment demand.

Central banks are big buyers of gold. Central banks more than doubled their gold purchases, Particularly active were some emerging market central banks, which are seeking to diversify their reserves.

2) China's Shanghai Composite Index fell 0.3 percent, a fifth straight day of losses, and is again near 3.5 year lows. China's commerce ministry said the trade outlook for China is worsening, with exports to EU countries dropping sharply. (Read More: China Warns of ‘Severe’ Trade Outlook, Blames Europe.)

3) Cisco Systems trading up pre-open, earnings beat estimates. The comments from CEO John Chambers echoed what we have heard from CEOs the entire earnings season: Europe is a problem, but he was more upbeat on the U.S.: "In the fourth quarter, with the exception of the federal government, we saw positive growth and/or uptrends, especially in the second half of the quarter." Orders in Europe, Middle East, and Africa were down 6 percent, with most of the weakness in Europe.

4) Trading volume is light everywhere. The FT reported: "The Australian Securities Exchange has seen a 'very soft start' to its new financial year with the value of equities traded on its market down by more than a third in the past six weeks."

—By CNBC’s Bob Pisani

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