Bunds and Treasury Yields Narrow

Despite the increase of product, US Treasury yields continue to fluctuate ahead of this week’s three US issues totaling $66b. German Bunds on the other hand are definitely trading under pressure, falling for the first time in four days, ahead of the Merkel and Christian Lagarde meet later this evening. The market seems somewhat optimistic that both leaders are “taking steps to resolve the region’s debt crisis.” Chancellor Merkel has indicated that the euro-zone is considering accelerating capital contributions to the region’s bailout fund (EFSF). French bonds have gotten the thumbs up after Fitch said the country will probably retain its AAA credit grade for this year.

Across the Atlantic, dealers have the privilege of taking down three auctions totaling +$66b this week, beginning with today’s three-year +$32b. Even with yields closer to their record lows, volatility in the asset class has dropped to its lowest level in almost seven-months because of the reduced participation rate as investors head to the sidelines. Big picture, the euro-region crisis remains at the forefront of the mind of many investors, and it is this that remains supportive for Treasuries at current key yield levels. The attractiveness of domestic debt affirms the “breakdown in the statistical relationship with economic data”. Stronger North American data seems to be providing investors better yield opportunities to add to their asset mix. The market remains skeptical about the “sustainability of the Euro recovery short term.”

Treasury prices turned a tad higher despite the +$32b three-year supply hitting the market. Some Fed officials remain open to the idea of further easing action. Both Fed members Williams and Pianalto remain “open to the efforts”. The US Treasury Department sold the 3-year notes at a yield of +0.37% to above average demand. The bid-to-cover was 3.73 versus a four auction average of 3.37. Indirect bidders (foreign central banks) took down +39% of the sale versus an average of +37.8%. Direct bidders took +5.3% vs. +11.3% in past sales.

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EUR Shorts wait for the Next Leg Down

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