US Yields Plummet, Prices Balloon

With the Democrats and Republicans “Super committee” at an impasse on how to reduce the US deficit, the biggest rally in government bonds in three-years shows no signs of abating even as yields hover around the lowest on record.

Again, prices have risen in the O/N session, pushing yields to a six-week low (10’s +1.96%), on speculation that US lawmakers will fail to break their deadlock and as Euro bourses fall amid concern that the region’s leaders will struggle to fix the sovereign debt crisis. It’s anticipated that the US congressional deficit-reduction committee is set to formally announce that its three-month-long effort to bridge partisan differences over taxes and spending has come to “nought”. Any hit to market confidence is negative to risky assets and is leading to a ‘flight to quality’.

Despite signs that the US economy is gaining some traction, the ongoing debt crisis in Europe is raising fears of year-end funding pressures, which is expected to support US note prices in the coming weeks. During this time of year, historically for all asset classes, liquidity is a premium. Risk aversion trading strategies have dominated ever since Italian, Spanish and French yields started to aggressively back up last week. The inability to create a Euro-firewall is promoting periphery contagion fears.

In this holiday shortened trading week supply should not be an issue. The US Treasury is scheduled to sell $35b of two-year notes today, $35b five-year notes tomorrow and $29b of seven-year notes on Nov. 23. Market expects good demand despite these low yields.

The Nikkei closed at 8,348 down-27. The DAX index in Europe is at 5,659 down-141; the FTSE (UK) currently trades at 5,254 down-109. US futures indices are in negative territory before the open.

     

    Other links:
    Week in FX: Europe Nov. 13-18

    U.S. Ten-Years:

     

    This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

    Dean Popplewell

    Dean Popplewell

    Vice-President of Market Analysis at MarketPulse
    Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
    Dean Popplewell