Euro optimism sinks US bonds

Despite Euro-yields trading within striking distance of their record highs, the US FI market has managed to back away from its record low yields for a second-consecutive day. The US price curve dropped on speculation that European leaders are closer to resolving the debt crisis and after an increase in US Thanksgiving retail sales eased concerns that the US economy would slip into another recession.

The belly of the US curve, 10-years yields (+2.02%), rose to the highest level intra-day in two-weeks as global bourses rallied, damping demand for the relative safety of US government debt. The tail of the curve had 30-year bonds trading north of +3% for the first time in over a week. The US/Bund spread has narrowed, as US product continues to underperform its European counterpart and thus reducing the “extra yield’ that investors required for holding bunds from almost the widest in two and a half-years. Somewhat positive speculation out of Europe over the weekend end has allowed investors to take off some of the risk premium off the table.

Treasury debt prices fell amid “a trio of really good excuses including strong Black Friday sales, a rumored IMF Eur+600b plan for Italy and talk of a Germany willing to issue a common European bond with its poorer neighbors,”. Even with some of these rumors being quashed is still providing that helping hand. However, that being said the story has nonetheless alerted the market to the possibility that some assistance might come from the IMF’s mission to Rome this week and the Eurogroup meeting.

Last weeks flight out of risk assets showed more investors adding US debt to their portfolios in the latest survey results. The percentage rose to +21% from +17% in the previous week. The percentage holding fewer treasuries than their benchmarks, actually fell to +9% from +11% in the same time period. Month-to-date, the 10-year yield has traded in a 29bp range, with a high of +2.16% and a low of +1.87% and is only one-month removed from Octobers +70bp swing. The market can expect this week to be dealing with some month-end window dressing and on a debt crisis debate that’s “increasingly centering on a definitive political response to the crisis.”

Tomorrow morning we will have all of Europe eyeing the Italian bond auctions to at least gauge the appetite for periphery product if nothing else.

Other links:
Beginning of the dollar pain trade?

U.S. Ten-Years:

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