US treasury prices remain on the front foot with yields plummeting. The middle of the US curve has fallen the most in a week on concerns that Italy will join neighboring Greece in struggling to form a strong government to implement austerity measures following the resignation of Berlusconi. With two governless peripheries, domestic yields are exploding. The inverted Italian yield curve is an economic sign that a recession is near. Italian 10-year product has barreled through that psychological +7% level, a yield that that triggered a call for a helping hand from other struggling peripheries.
The lack of domestic data releases this week has investors focusing on Ã¢â‚¬Å“headline riskÃ¢â‚¬Â. This has pushed US 10Ã¢â‚¬â„¢s through the psychological +2% mark (+1.97%) while economic risk has been tossed to the wayside. Risk aversion trading strategies remain in vogue and one of the reasons why TuesdayÃ¢â‚¬â„¢s US three-year auction went so well. The three-year notes attracted the highest demand on record, boosted by investors seeking a refuge from EuropeÃ¢â‚¬â„¢s sovereign debt problems. The biggest market concern is how well the remaining auctions will fare?
Tuesday was Ã¢â‚¬Å“strongÃ¢â‚¬Â, but WednesdayÃ¢â‚¬â„¢s was Ã¢â‚¬Å“tepidÃ¢â‚¬Â to say the least. The $24b 10-year sale drew a yield of +2.03%, compared with a yield of +2.016% just before the sale. The bid-to-cover ratio was 2.64, the lowest in two-years, compared to 3.12 from the past eight auctions. Indirect bidders remain robust at +41.6% compared to +44.3% for the past eight sales. Direct bidders purchased +8.2% of the notes compared with an average of +11.5%.
Investors note that the Fed is having no problem finding demand for its short-term bonds as it focuses further out the curve. This is a sign that the strength in the economy seen last month may be Ã¢â‚¬ËœshortÃ¢â‚¬â„¢ lived. Growing demand for shorter-maturity suggests that investors remain concerned that EU sovereign debt crisis may worsen and this despite last monthÃ¢â‚¬â„¢s US indicators revealing something different.
The market will now focus on the last of this weeks US auctions, the +$16b long bond.
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