Bonds in demand with Italy unloved

US treasuries remain in demand as Italian Prime Minister Berlusconi faces calls to resign amid concern the country will struggle to pay its debt obligations. In the middle of the US curve, benchmarks had extended their O/N gains as Italy’s 10-year yields reached +6.74%, another new record high, on signs the government was about to topple. Since the record print and with global bourses in the black, has FI giving up some of those early European gains.

It seems that the Fed is having no problem finding demand for its short-term bonds as it focuses further out the curve, a sign that the strength in the economy seen last month may be ‘short’ lived. Growing demand for shorter-maturity suggests that investors remain concerned that EU sovereign debt crisis may worsen, slowing global growth despite last month’s US indicators revealing something different (unemployment rate at +9%, retail sales up+1.1% and US durable good orders the highest in six-month). The bids suggest that government borrowing costs may stay at about record lows while the US ramps up borrowing to finance that mounting deficit. Even with “Operation Twist” successfully flattening the curve,” has not caused a sell off in the shorter maturities the Fed has been disposing of and supports the bullish trend.

US Treasury is scheduled to sell +$32b 3’s today, +$24b of 10’s tomorrow and +$16b of longs on Thursday. The situation in Europe remains the buying catalyst for US product. Italian yields at record highs is unsustainable for continuous refunding. Dealers expect a strong demand for the auctions, unless event risk is required to be priced out.

The Nikkei closed at 8,655 down-112. The DAX index in Europe was at 6,017 up+89; the FTSE (UK) currently is 5,579 up+69. The early call for the open of key US indices is higher.


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    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