Global Yields Hit Record-Lows As Fear Grips Markets

Fixed-income markets signaled a new level of fear on Wednesday with no solutions in sight for Spain and global growth slowing. The yen was the top performer while the Australian dollar lagged. The calendar is plentiful in Asia including Japanese industrial production and Australian building approvals. Wednesday's Intermarket Insights contain new trades on EUR/USD, AUD/USD, and GBP/USD as well as 4-in-1 Charts on intermarket cyclicals. More Below

Yields on US, German and UK 10-year debt hit record lows in a sure sign that the European financial crisis has entered a new stage. The yield on the German 2-year schatz hit 0% with investors fleeing to safety and eager to hold something akin to a call option on Deutsche Marks in case of a eurozone breakup. At the same time, Spanish 10-year borrowing costs hit the highest since November.

In fx, the worries translated to EUR below 1.24, cable below 1.55 and USD/JPY below 79, all cycle lows with the commodity bloc closing in on similar breakdowns. Oil fell nearly $3 to $87.82 and the S&P 500 declined 1.4%.

Headlines werent particularly frightful but the Italian 10-year auction over 6% and a lack of meaningful direction to quell the credit crunch in Spain sparked a rush to the exits. A Greek poll showed Syriza back in the lead with 30% of the vote and other showed them in a tie with New Democracy. US pending home sales plunged 5.5% in April compared to the flat reading expected.

European officials dont have a coherent plan as ECB rumors continue to be unfounded and Rehn ruled out taping the EFSF for banks. Eurobonds remain on the table but they are a long-term solution to a problem that needs near-term action.

The market is coming to the conclusion that its outside of the political structure of will of European politicians to adequately address the crisis and the fallout for global growth could be severe.

In the US, policymakers are also aloof. The Feds Dudley said the costs of further QE probably outweigh the benefits while Fisher said liquidity is adequate. The Boston Feds Rosengren called for more QE but hes a marginalized voice at the table.

Early in the Asia-Pacific session, Brazil is expected to announce a 50 bps rate cut to 8.50% but a 75 bps cut cant be ruled out. The Brazilian finance minister scaled down his growth estimate to at least 3% today from the January 4.5% estimate.

At 23:50 GMT, Japan will release April industrial production, which is expected to gain 0.5% m/m. At 01:30 GMT, Japanese labor cash earnings are forecast to increase 1.1%. At the same time, Australian April building approvals are expected up 0.3%.

Our cyclical charts shown over the last 4 months on BRICs policy rates, eurozone macro deterioration, EU-US LIBOR spreads and the implications of EU Libor leading the decline (instead of USD labor pushing higher) are all outlined in todays Intermarket Insights with the latest trades.