Investor concerns ease as markets calm

Markets calmed yesterday as investors’ concerns eased a little about the uncertainties created by potential changes in the French and Dutch governments.

An auction of €2bn worth of two- and 25-year bonds by the Netherlands went off better than expected after the collapse of the government over a failure to agree austerity measures.

Yields in fact fell the most in more than four months.

Other beleaguered countries, including Spain, also benefited from the relative calm as they too got bonds away, but had to pay almost double what it did a month ago and failed to raise the full €2bn target.

The euro rose slightly against other currencies including the yen and US dollar.

The cost of insuring European sovereign debt against default declined and European stocks also rose.

“We are comfortable now that this is out of the way, this is not the start of a sustained spread widening,” David Schnautz, a fixed-income strategist at Commerzbank AG in London, said of the Dutch bond sale.

“There’s a lot of hype regarding the Netherlands and this was exacerbated by the looming supply. The commitment to fiscal prudence is very high across the Dutch political spectrum.”

But investment managers, including Citigroup and Lombard Odier, were quick to warn that it was still all to play for, saying the debt crisis was entering its second wave, the ECB’s LTRO was creating problems for the future and that policymakers needed to signal more action to stem the debt crisis.

For Ireland, there is some good news on the horizon as a report due out today on the British economy is expected to show that the country — one of Ireland’s main importers — has avoided a recession.

Optimism led to sterling reaching an almost six-month high against the US dollar.

Spain — expected to be the epicentre of any new euro crisis — paid a little less than expected when it sold €1.9bn of bonds yesterday.

The Spanish had originally planned to sell €2bn and last year had pencilled in €6bn.

Demand for three-month bonds more than doubled compared to last month, but the average rate was 0.634% compared to 0.381%.

Demand for longer-term six-month bills fell from 7.61 to 3.51 last month.

The rate was 1.58% compared to 0.836% at the March 27 auction.

The sale and its conditions engendered a little confidence with Spanish 10-year bonds falling after the auction to 5.96% compared to 6% the previous day. The economy ministry said it had now covered half of its liquidity needs for the year.

“Spain managed to get the bills away and that’s positive in the midst of eurozone uncertainty,” said Brian Barry, an analyst at Investec Bank Plc in London.

“Yesterday there was a knee-jerk reaction to the negative news in France and Holland, but today the market has had time to digest the news and feel more confident.”

(Additional reporting, Bloomberg)