Risk Aversion absorbing US Debt Supply

Even with $78b of US product (notes, bonds and inflation-linked debt) coming down the pipeline this week, treasuries remain in demand. The heavy issuance’s in the remainder of the year (+$177b of varying duration-bills, notes and bonds) normally would make it easier for dealers to take advantage of both supply and price, however, developments in Europe has investors wading towards the sidelines and requiring more product for surety reasons.

It was not a market surprise that the mention of a rating agency had US yields under pressure today. Bond prices rose after Moody’s said it will review ratings for all EU countries, citing a failure to produce “decisive” measures to end the region’s debt crisis at “the” summit last week. The US 2/30’s yield curve flattened -7bp to +282bp as Italian (+43bp to +6.79%-highest since Dec 1) and Spanish (+32bp to +6.07%-also highest since Dec 1) sovereign bonds led price declines among higher-yielding European sovereign debt. Even Germany managed to dip their oar into the ECB debate by questioning the duration of the central banks role. The Bundesbank president stated that the “onus is on governments rather than the ECB to resolve the crisis with financial backing”.

With the lack of decisiveness out of Europe has led to treasuries remaining better bid on pull backs. The continuing uncertainty will keep safe-haven Treasuries from selling off much even as the market absorbs the supply. Fitch has echoed a lot of what Moody’s warned about earlier, citing that the latest EU agreement is “not big enough to stem the region’s debt crisis”. They are predicting a “significant economic downturn” in the short term.

Today, US treasury auctioned off +$32b in three-year notes. The note sale booked the highest bid-to-cover ration (3.62 vs. 3.29) in 18-years. Indirect buyers took down +39.1% of the sale, on par with +40% average over the past four-auctions. Direct buyers picked up +7% of the offering, below the +12.4% recent average. With volumes drying up near year-end and participation at December auctions normally lighter, market attention will now shift towards tomorrow’s +$21b 10-year offering and Wednesdays +$13b long bond.

Tomorrow, we also get the FOMC rate announcement, before that it’s US retail sales. Will an underperforming sales surprise print open up the QE3 debate again?

The Nikkei closed at 8,653 up +117. The DAX index in Europe was at 5,785 down -201; the FTSE (UK) closed at 5,427 down -101. US indices remained in negative territory with the Dow currently trading at 11,970 down -213.

     

    Other links:
    Euro Summit long on rhetoric, Short on Specifics

    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