By Benjamin Streed
April 16, 2012
A combination of factors helped push 10-yr Treasury yields back below 2.00% after it appeared we were set to close the week above this psychological threshold. For the week, yields across the curve fell, after having risen substantially Tuesday and Wednesday; the 5-yr note fell 3.5bp to yield 0.84%, while the 10-yr and 30-yr were down 7bp and 8.8bp to yield 1.98% and 3.12% respectively. Despite the intra-day, or even intra-week hiccups, the continued gains in the benchmark 10-yr note marked its fourth consecutive weekly rally, its longest stretch of increases since last August. The cause for this “risk off” sentiment is multifaceted; although CPI/PPI data met expectations and helped quell concerns that inflationary pressures may be rearing their head again, the markets were disappointed with weak mortgage applications, higher-than-expected initial jobless claims and weak GDP figures out of China. Additionally, the Federal Reserve’s Beige Book, which is comprised of mostly anecdotal evidence provided by regional Fed surveys, offered little in the way of new commentary as to the status of the U.S. economy, but chose instead to reiterate just how “modest” our situation is. “The economy continued to expand at a modest to moderate pace” stated the report, and there was “modest growth” in most of the Fed regions as well as general price inflation that is considered “modest” despite recent notable increases in fuel prices. All of this is likely ancillary to what is considered the most important factor affecting risk-free yields at the moment; fears are once again emanating out of the Eurozone regarding its ongoing debt-crisis, but this time it isn’t Greece taking the headlines, its Spain.
The situation in Europe continues to deteriorate as the cost of insuring against Spanish debt jumped to a record high last week. Bloomberg figures show that Credit Default Swap contracts on the country’s 5-yr debt demanded a premium of 521bp, up 60bp last week and over 170bp since the beginning of February, surpassing its previous high of 493bp set back in November. This comes on the heels of Spanish banks utilizing the European Central Bank’s (ECB) lending facility at an astounding rate as borrowings were up an staggering 50% last month. Interestingly, ECB board member Benoit Coeure commented that the bank could potentially revive its bond-purchase program to help Spain if needed but his Dutch colleague, Klass Knot said a few days later that the ECB is “very far” from using this measure again. Despite Knot’s comments, the very same day Jaime Garcia-Legaz, a Spanish deputy minister insisted that the ECB, “should step up purchases of bonds” to help the ailing country. The ECB’s bond buying program was halted a month ago after nearly €1 trillion of 3-year loans were made to Eurozone banks to help stem the crisis.
This week, Spain is preparing to sell short-term debt on Tuesday, and more importantly, 2-year and 10-year debt on Thursday. The relative success/failure of these auctions will send vital signals to the marketplace as to whether or not the debt-crisis that currently plagues Greece is spreading to peripheral countries. Spanish 10-year yields sit just north of 6.00%, much higher than the sub 5.00% seen last month and still below the 6.70% range seen last November. The markets will watch to see whether or not Spain’s longer-term yields continue creeping towards 7.00%, as this was the level that pushed Greece, Ireland and Portugal to seek rescue packages.
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