With the Democrats and Republicans Ã¢â‚¬Å“Super committeeÃ¢â‚¬Â 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 (10Ã¢â‚¬â„¢s +1.96%), on speculation that US lawmakers will fail to break their deadlock and as Euro bourses fall amid concern that the regionÃ¢â‚¬â„¢s leaders will struggle to fix the sovereign debt crisis. ItÃ¢â‚¬â„¢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 Ã¢â‚¬Å“noughtÃ¢â‚¬Â. Any hit to market confidence is negative to risky assets and is leading to a Ã¢â‚¬Ëœflight to qualityÃ¢â‚¬â„¢.
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.
Week in FX: Europe Nov. 13-18