With Merkel and Sarkozy meeting in Paris has US treasuries under pressure. The respective leaders want to rewrite the EU treaty allowing a new one to contain a debt turmoil clause, reducing refuge demand. The long end of the US curve is leading the losses, with 10Ã¢â‚¬â„¢s and 30-years backing up +7bps. Even with Italy announcing an austerity plan to cut the euro regionÃ¢â‚¬â„¢s second-biggest debt has the market believing that we are seeing stronger coordinated efforts to stop the Euro-contagion.
This coordinate effort is having a large impact on EU periphery debt. Spanish 10-year product is trading at a seven-week low while Italian 10Ã¢â‚¬â„¢s are trading at their highest price (inverse relationship) in four months after Prime Minister Monti announced +EUR30b of measures to cut the nationÃ¢â‚¬â„¢s debt load. With Italian yield falling further away from the psychological +7% level, has the Btp/Bund spread tightening to as little as +3.94% for 10Ã¢â‚¬â„¢s (the least since the end of October). EU leaders are scheduled to meet at the end of the week to address the regionÃ¢â‚¬â„¢s debt crisis after the failure of their fourth rescue blueprint intensified.
Treasuries briefly pared their losses after the ISM non-manufacturing index fell to 52 in November from 52.9 a month earlier. Current weekly surveys maintain their bearish bias towards US product. Last weeks flight out of risk assets showed more investors adding US debt to their portfolios. The market expects yields to be squeezed higher until we get a clear indication from EU leaders this week what the course of action will be taken.
Make or Break for the EUR this week?