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 MoodyÃ¢â‚¬â„¢s said it will review ratings for all EU countries, citing a failure to produce Ã¢â‚¬Å“decisiveÃ¢â‚¬Â measures to end the regionÃ¢â‚¬â„¢s debt crisis at Ã¢â‚¬Å“theÃ¢â‚¬Â summit last week. The US 2/30Ã¢â‚¬â„¢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 Ã¢â‚¬Å“onus is on governments rather than the ECB to resolve the crisis with financial backingÃ¢â‚¬Â.
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 MoodyÃ¢â‚¬â„¢s warned about earlier, citing that the latest EU agreement is Ã¢â‚¬Å“not big enough to stem the regionÃ¢â‚¬â„¢s debt crisisÃ¢â‚¬Â. They are predicting a Ã¢â‚¬Å“significant economic downturnÃ¢â‚¬Â 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 tomorrowÃ¢â‚¬â„¢s +$21b 10-year offering and Wednesdays +$13b long bond.
Tomorrow, we also get the FOMC rate announcement, before that itÃ¢â‚¬â„¢s US retail sales. Will an underperforming sales surprise print open up the QE3 debate again?
Euro Summit long on rhetoric, Short on Specifics 
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