By Dean Popplewell
With euro event risk abating, U.S. yields are backing up, especially further out the curve. The 10/30’s spread (+107) has widened the most in three months as signs emerge that the euro debt crisis may be stabilizing. This reduced demand at last week's auctions for the product. The U.S. long bond yield (+3.13%) has rallied from the lowest level in a month as both Greece and Italy have taken steps over the weekend to shore up new governments and address their budget and sovereign debt problems. This has reduced the demand for safer haven assets. With last Friday being a U.S. holiday, the fixed-income markets have some catching up to do, especially after the proactive political measures that took place this weekend.
Last week’s U.S. auctions received mixed reviews. The three-year notes attracted the highest demand on record, boosted by investors seeking a refuge from Europe’s sovereign debt problems. However, as the week progressed and with U.S. yields plummeting in response to Italian yields ballooning, the risk reward for owning U.S. product at such low levels was not attractive and lead to two “tepid” longer dated auctions. The $24 billion 10-year sale drew a yield of +2.03%, compared with a yield of +2.016% just before the sale. The bid-to-cover ratio was 2.64, the lowest in two-years, compared to 3.12 from the past eight auctions. On November 10, the $16B 30-year sale of bonds drew a yield of +3.199%, compared with the average forecast of +3.148%. The bid-to-cover ratio was 2.40 compared with an average of 2.68.
Investors note that the Fed is having no problem finding demand for its short-term bonds as it focuses further out the curve. This is 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 the EU sovereign debt crisis may worsen and this despite last month’s U.S. indicators revealing something different.
Italy has an important 5-year auction Monday morning and the ECB presence is expected. If so, U.S. longer dated yields should ease further. Currently, the market is a better seller of product on rallies.
Update: The Nikkei closed at 8,514 up+14. The DAX index in Europe was at 6,057 up+189; the FTSE (U.K.) closed at 5,545 up+100. U.S. indices remained in positive territory with the Dow at 12,153 up+259.