The markets sole focus of attention this morning has been on Italy, not for its football, food or wine, but for its bonds. Do we like em? Do we want them? Funding requirements for Germany, the UK and the US has brought varying results over the past 24-hours. Yesterday, a 10-year bund auction was taken down â€˜technicallyâ€™ uncovered. A first for any issue in Germany this year, while demand in the UK for its 5-year gilts and the US treasury’s 10-year product recorded a weaker bid-to-cover ratio. Itâ€™s not a sign that those countries are having problems placing their debt, more that their yields are too â€˜skinny.â€™
Concerns over the Spanish government’s ability to mend its finances have many questioning the viability of the Euro-periphery. It has been a field day for fixed income traders who continue to put the squeeze on the regions debt yields. Italian bonds have not been immune from the selloff. Earlier this week, their bond yields spiked to their highest levels in two-months, however market hope that the ECB could revive bond â€˜purchasesâ€™ in the secondary-market have helped to stem the one directional rise in yields, temporarily at least.
A day after its borrowing costs jumped at a treasury bill auction, Italy came to market this morning, selling up to +EUR5b worth of bonds, including the three-year benchmark. It is not a surprise that Italy has been forced to pay up for 3-year product, with yields settling at +3.89% vs. +2.76% a month ago. The market only concern is how the EUR would react. Thus far, itâ€™s has been a muted response, not even delayed, and its this that will probably confuse investors even more. A clean cut move would provide many with a stronger conviction, however, a EUR confined to a contained range only confuses trading strategies.
Now what are investors to grasp for? US earning season results? The EURâ€™s quick reversal from weakness seen earlier this week is not a sign of long-term reversal in sentiment. It has mostly been market action dictated by option traders. Despite the choppiness of this market, if you are a bear, this movement is providing amble opportunity to short the periphery plagued EUR from better levels a week ago. If you are a bull, your continue to shout that there are better levels to short this market. However, the tighter the range the more second guessing occurs, and its this element of doubt that is clouding some rational fundamental and technical logic. â€œIt ainâ€™t over until the opulent lady singsâ€ or until option traders have lost their interest.
Leveraged and European names have tried to push the EUR down through 1.31 this morning, however support into the 1.3105/0 expiry brace has helped limit the decent. Until further notice, the single currency is threatening to once again consolidate between the 1.3100/50 strikes.