Yields and basis point (bp) movements of some of the most-watched 10-year bonds this afternoon:

US: 1.95% (2bp)
UK: 2.09% (no change)
Germany: 1.61% (1bp)
France: 2.23% (no change)
Spain: 5.37% (-6bp)
Italy: 4.56% (-3bp)

[NOTE: there are 100bp to a percentage point]

US bond yields rose by two basis points to 1.95% as the market reacted to comments made by a Federal Reserve official at a symposium on Thursday evening.

A Wall Street Journal article reported: "Federal Reserve Board Governor Jeremy Stein said there isn't an imminent threat to the wider financial system, but highlighted several markets—including junk bonds, mortgage real-estate investment trusts and commercial banks' securities holdings—as areas where potentially troubling developments are emerging, possibly as a result of the Fed's easy-money policies."

Meanwhile, positive results were published by the Commerce Department showing that the US trading deficit had narrowed sharply in the month of December. The trade gap shrank 20.7% to $38.5bn, representing the smallest gap since January 2010. Analysts polled by Reuters news agency had expected a deficit of $46bn.

In the UK, bond yields were flat at 2.09% as revised data from the Office of National Statistics(ONS) showed that construction had risen by 0.9% in the fourth quarter of 2012. Its previous assumption, used in the first estimate of UK economic growth in the fourth quarter, had been for a rise of 0.3% in the sector. However the ONS reported that the revision would have no significant impact on fourth quarter GDP, which shrank by 0.3%.

The contraction in the economy raised fears that the UK could slip back into a recession. Friday also saw the auction of a number of treasury bills. The Treasury sold £2.5bn of 28-day, £0.5bn 91-day and £0.5bn 182-day bills collectively which had yields of 0.3041%, 0.2715% and 0.3717% respectively.

In Germany, yields climbed by a single basis point to 1.61% as the German government voiced concerns over the use of international currency depreciation as a way of increasing competitiveness over the long-term.

Georg Streiter, Germany's deputy government spokesman, said on Friday: "A targeted depreciation can confer a short-term boost to the export economy. In the opinion of the German government, this isn't a sustainable way to strengthen competitiveness."

In France, bond yields plateuxed at 1.61% as the Central Government trade deficit contracted by 19% to 87.2bn euros, a reduction from the previous month's 103.4bn euros. Meanwhile, a French appeals court suspended a Peugeot Citroen restructuring plan that called for 8,000 job cuts, according to a report puiblished on France24.

In contrast to one week ago, Spanish yields fell by six basis points to 5.37% as Soraya Saenz de Santamaria, Deputy Prime Minister of Spain, said that Premier Mariano Rajoy would not let corruption allegations distract him from tackling Spain's economic crisis.

"We have a government that is going ahead with its reform plans, that is passing laws and changing the country," she was cited by Bloomberg as saying at a press conference.

"That is the stability this government's work is creating." The comments came six days after Rajoy denied allegations from El Pais newspaper that he received money from a secret slush fund.

A rise in Italian production may have underpinned the three basis point contraction in Italian bond yields to 4.56% on Friday. Data from Italy's national statistics office, Istat, showed that industrial output rose more than forecast in December for the first time in four months. Output increased by 0.4% from November, when it dropped a revised 1.1% and fell 2.2% in the three months through December.

MF

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