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Fighting To Hold Ground After Late Risk Rally Overnight
Posted to: Micro News
Monday, December 03, 2012 9:40 AM

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The overnight session began well enough for bond markets with 10yr yields right in line with Friday's latest levels as late as 5:50am. Despite the relative flatness, several developments in Europe were already starting to weigh on Treasuries and Core EU debt.

Greece announced a bond buy-back with a price range that exceeded market expectations. The buy-back itself is part of last week's agreement, and not unexpected, but the price range wasn't yet determined. Bolstering the sense of positivity surrounding Greece was a separate report from a German paper over the weekend that Merkel raised the possibility of public sector haircuts on Greek debt (also seen as OSI or "official sector involvement"). Multiple Eurozone Finance Ministers quickly dismissed the possibility, but its mere mention by Merkel is "new," and probably an anecdote that errs on the side of bond market weakness in the US.

The biggest dose of weakness for domestic bond markets came late in the overnight session as Spain made a formal request of EU aid to the tune of €39.5 bln. It's important to note that this IS NOT a sovereign request, but rather, the decision on an amount for the "up to €100 bln" already agreed to for Spanish BANK RECAPITALIZATION. Some of the initial fervor of the reaction could be due to this distinction (though the reaction would likely have grown and been bigger if it was a sovereign request).

All of the above ushered domestic bond markets in the door at moderately weaker levels with 10yr yields coming in the door just over 1.64 and Fannie 3.0 MBS right at 105-00. Since then, MBS have been able to hold sort of a choppy, sideways slightly, while Treasuries have been clearly drifting higher in yield, though gently so. A slightly better-than-expected Manufacturing PMI reading from Markit played a small contributing role heading into the 9am hour, and 10am brings the ISM Manufacturing PMI. If it confirms the positivity, it will be interesting to note markets' willingness to react to economic data with other, bigger events looming (NFP this Friday, FOMC next week, Fiscal Cliff in general).




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