With Euro event risk abating has US yields backing up, especially further out the curve. The 10/30’s spread (+107) has widened the most in three-months as signs the Euro debt crisis may be stabilizing, reduced demand at last weeks auctions for the product. The US long-bond yield (+3.13%) has rallied from the lowest level in a month as both Greece and Italy have taken steps over the weekend to shore up new governments and address their budget and sovereign debt problems. This has reduced the demand for safer haven assets. With last Friday being a US holiday the fixed-income markets has some catching up to do, especially after the proactive political measures taking place this weekend.
Last week’s US auctions received mixed reviews. The three-year notes attracted the highest demand on record, boosted by investors seeking a refuge from Europe’s sovereign debt problems. However, as the week progressed and with US yields plummeting in response to Italian yields ballooning, the risk reward for owning US product at such low levels was not attractive and lead to two “tepid†longer dated auctions. 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. On November 10, the $16b 30-year sale of bonds drew a yield of +3.199%, compared with the average forecast of +3.148%. The bid-to-cover ratio was 2.40 compared with an average of 2.68.
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 ‘short’ lived. Growing demand for shorter-maturity suggests that investors remain concerned that EU sovereign debt crisis may worsen and this despite last month’s US indicators revealing something different.
Italy has an important 5-year auction Monday morning and the ECB presence is expected. If so, US longer dated yields should ease further. Currently, the market is a better seller of product on rallies.
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