Bonds in demand with Italy unloved

US treasuries remain in demand as Italian Prime Minister Berlusconi faces calls to resign amid concern the country will struggle to pay its debt obligations. In the middle of the US curve, benchmarks had extended their O/N gains as Italy’s 10-year yields reached +6.74%, another new record high, on signs the government was about to topple. Since the record print and with global bourses in the black, has FI giving up some of those early European gains.

It seems that the Fed is having no problem finding demand for its short-term bonds as it focuses further out the curve, 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, slowing global growth despite last month’s US indicators revealing something different (unemployment rate at +9%, retail sales up+1.1% and US durable good orders the highest in six-month). The bids suggest that government borrowing costs may stay at about record lows while the US ramps up borrowing to finance that mounting deficit. Even with “Operation Twist” successfully flattening the curve,” has not caused a sell off in the shorter maturities the Fed has been disposing of and supports the bullish trend.

US Treasury is scheduled to sell +$32b 3’s today, +$24b of 10’s tomorrow and +$16b of longs on Thursday. The situation in Europe remains the buying catalyst for US product. Italian yields at record highs is unsustainable for continuous refunding. Dealers expect a strong demand for the auctions, unless event risk is required to be priced out.

U.S. Ten-Years:

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