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.

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

U.S. Ten-Years: