US Curve Flatter Despite a bid EUR

Even stronger domestic fundamental data cannot pressure US bond prices. Longer dated securities again have caught a bid on concerns that the Greek Prime minister has requested the country’s finance ministry to prepare a document on the implications of a Greek default. Earlier today Treasuries came under pressure as dealers prepared to take down +$72b of new product this week. The government is to auction +$32b in three-year notes tomorrow, followed by +$24b of 10-year debt on Wednesday and $16b long-bonds on Thursday.

Merkel and Sarkozy indicated in Paris this morning that time was running out for Greece.
Any negative headlines regarding Greece and rumors of default will only increase the markets appetite for risk aversion trading strategies. Before today, long bonds managed to back up +18bp over the past three trading sessions. Despite initially been oversold on the back of a stellar NFP report that saw the US unemployment rate improve three ticks to +8.3%, the 2/30’s yield curve has flattened -3bp to +286bp.

Prime Minister Papademos over the weekend asked the ministry “to record accurately and realistically all the consequences of the country’s exit from the euro zone.” Greece still has not come to an agreement on the austerity measures needed to qualify for a second bailout from the EU and IMF. Today, the Greek government has agreed in principle to axe -15k workers to fulfill one of Troikas conditions (a reason why the EUR has temporarily caught ‘a second wind’). Papademos needs to receive funds by March in order to avoid a ‘disorderly default’. Not helping market sentiment are the negotiations between Greece and the PSI bondholders remaining unresolved.

All parties concerned have a strong incentive to reach a deal and it would not be surprise to see an agreement in the next few days. However, once a deal is reached, markets again will begin to focus on the degree of actual participation in the swap by bondholders. The market seems to be looking for other reasons to apply risk aversion trading strategies.

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Loonie at the Mercy of the Ivey

U.S. Ten-Years:

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