Will the US embrace EURs new found confidence?

The EUR’s low (1.2663) print of yesterday is but a distant memory in this monotonous trading range. Especially after this mornings successfully strong Spanish bond and Italian bill auction. Until know, the market had been fueled by French rating rumor troubles over the past couple of trading sessions. All denied of course, however, the half hearted participation rate has made for a number of dull trading days. This weeks focus really starts today with the highly anticipated Spanish and Italian issues. The market gets to see how interested investors are in investing in theses two economies with so much to lose. Will Premier Monti and Prime Minister Rajoy get the recognition for their austerity efforts?

Thus far, the yield on the Italian 10-year bond has remained near the psychological +7% level that prompted Greece, Ireland and Portugal to seek bailouts. In contrast, Spanish debt has fared better with the 10-year issue hovering close to the +5% watermark. Despite a worse than expected outcome for Spain’s 2011 fiscal deficit and ongoing concerns over banks’ bad debts, Spanish yields have improved on stronger sentiment across the region. This has been proven this morning with Spain delivering a strong auction.

Spanish treasury successfully auctioned +EUR9.98b of government bonds, double the amount it had planned. The average yield in the auction came in below secondary market levels, a sign of strong demand. This has also helped to push German Bunds down to healthier levels, encouraging the exiting of some risk averse positions. Not to be left out in the cold, Italy sold 1-year bills at +2.735%, vs. +5.952% on December 12. In total, Italy successfully sold +EUR12b T-bills, meeting its target, and at the same time seeing its borrowing costs plunge in the country’s first debt sale of the year and in the process helping sentiment give a lift to the single currency. On the data front, Italy is also helping the EUR to test this weeks highs. This morning’s Industrial Production release was slightly higher (+0.3% vs. -0.5% seasonally adjusted) than expected in November, and this despite the euro-zone third largest economy having already entered a recession. Its not surprising that the rise was led by the energy sector.

Market focus now turns towards the ECB. Policy makers are not expected to announce new measures or easing beyond what was launched last month. Some of the changes to collateral requirements are not yet in effect, its probably prudent for Draghi and company to at least assess the impact of the next three-year LTRO (long term refinancing operation) before adding new measures. Will North America embrace EUR’s new found confidence?

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Bunds and Treasury Yields Narrow

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