US Treasury prices again have rallied (+2.03%), after yields on European government bonds spiked due to uncertainty whether newly elected Italian and Greek technocrats could implement tough austerity measures and reforms without a local political base. Ã¢â‚¬Å“This confidence crisisÃ¢â‚¬Â has Italian bonds leading the way again with 10Ã¢â‚¬â„¢s closing this evening north of +7%, and just below last weekÃ¢â‚¬â„¢s historical high yields (+7.48%). The absence of any aggressive ECB bid for Italian paper despite positive weekend political developments in Rome has boosted perceptions of systemic risk in the region.
Later this week, Spain and France come to the market with the Spanish planning to auction a maximum Eur+4b of 10-year product on Thursday, while on the same day, France sells as much as EUR+7b of notes and up to EUR+1.2b of inflation-linked debt. Currently, in this trading environment there is little appetite for periphery product. The demand for Bunds and US debt remains formidable.
Treasury prices are off from their highs on the day after US retail sales rose more than expected (+0.5%) and after the Empire State Manufacturing Index showed (+0.6%) that growth in New York state rose for the first time after five months of contraction. Investors are battling between stronger US fundamentals that requires higher yields and the Euro fear factor that warrants lower yields and perhaps a Central Banks that needs to apply further easing accommodation. If the Italian government is capable of pushing deeper austerity measures through, then US yields should have the capacity to back up in a hurry. For the time being, investors remain better buyers of product on pullbacks.
Euro headache intensifies