German government bonds opening lower on the last trading day of the year, with volumes thin in a holiday shortened session. Given the lack of liquidity and light volume trading the risk of short-covering remains as investors turn their focus on 2012, with general view that the EUROZONE sovereign debt crisis is likely to extend into the New Year. Bunds are seen supported by month-end extension buying, where the iBoxx EURO sovereign index is estimated to extend by +0.06 years into Jan. Whilst this is a medium extension, it is seen as significant given it is above recent average for this time of the year and a fresh record. In addition, mkts will remain on ratings watch into the New Year after Fitch joined into the battle of downgrades on Dec 16 and placed Belgium, Spain, Slovenia, Italy, Ireland and Cyprus onto Rating Watch Negative (RWN). This follows S&P Ratings announcement to place 15 out of the 17 eurozone sovereigns on CreditWatch Negative outlook on Dec 5. Rating agencies typically resolve CreditWatch/Review actions within 90 days, but S&P then said that it will attempt to resolve sooner, if possible.
EasyForexNews Research Team