FX eyes Euro Yields for direction

The theme remains the same for the Fixed Income market. Euro-yields continue to balloon. This morning’s Spanish T-bill auctioned happened to hit a 14-year yield high as political uncertainty about a solution to the Euro-Zone’s sovereign debt crisis ‘punished another vulnerable southern European country’. With Germany continuing to block the two exit routes from a crisis, a massive ECB intervention to buy bonds, or joint issuance of Euro-zone debt, continues to squeeze the funding costs of the periphery nations.

All this is pushing US 10’s (+1.96%) to trade near their six-week low yields as investors seek shelter from contagion fears that could stoke slow global economic growth. The flight out of risk assets shows more investors adding US debt to their portfolios in the latest weekly 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.

Even reports showing that the US economy expanded less than previously estimated during Q3 (+2% vs. +2.5%) is aiding investors in their decision buying process. Bonds, thus far, have not reacted much to the failure to reach a deficit-reduction plan in the US, but the equity markets reaction could undermine investor’s appetite to take on more risk. Moody’s toying with Frances credit rating will only tighten the US/Bund spread even further (+6bps). Year-to-date, the spread has averaged +0.14bps.

The US Treasury is auctioning a total of +$99b in 2’s, 5’s and 7-year notes in the first three-days of this holiday shortened week. Yesterday’s +$35b two-year sale saw solid demand and today’s 5’s happened to record similar interest. The $35b 5’s drew a strong yield and was taken down at a record low yield of +0.935%. The bid-to-cover was 3.15. The only other auction with a better bid-to-cover was on May 5th at 3.20. Indirect buyers scooped up +45.3% of the sale, while direct buyers picked up +9.6% of the offering.

The IMF announcing that their Board approves two new lending tools were member countries can borrow ten times their contribution has done little so far to dissuade investors to shy away from yield play.

Other links:
What’s the Euros next price?
Canada’s Retail Sales Doubles in September
France’s Triple A rating in Jeopardy

U.S. Ten-Years:

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