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Bond Markets Holding Ground After Opening Weaker
Posted to: Micro News
Tuesday, December 11, 2012 9:24 AM

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The overnight session got off to a lackluster start with very little movement or volume seen during Asian hours. European peripheral debt kicked off the selling trend for European core debt and ultimately US Treasuries. This began at a moderate pace after Italian 10yr debt moved into positive territory on the day (what's good for Italian/Spanish/Greek debt--aka "periphery"--is generally bad for German debt--aka "core." German debt tends to serve as a rough guide for US debt overnight).

The news that seems to have guided the reversal in Italy is questionable and that movement may have been purely incidental. Less questionable is the positive impact from relatively strong Spanish Bill auctions and the night's biggest mover--strong economic data in Germany. The ZEW economic sentiment index was significantly stronger than expected (+6.9 vs -12.0) and capped off a series of negative developments for Core EU debt and US Treasuries.

Given that the economically bullish data was of European origin, the biggest effects were felt/seen first in German Bunds, but Treasuries followed a lower magnitude version of the sell-off at first, and made up ground as the first domestic traders came online. The most recent shock this morning came shortly before the 8:30am economic data as Greece announced their debt buyback target was reached--a precursor for Thursday's bailout payment. The 8:30am Trade Deficit data subsequently had no effect on bond markets.

Post-Roll (January Coupons now) MBS kicked off the domestic session about an eighth of a point weaker than yesterday's latest levels at 104-28 and currently trade in the same territory after an earlier dip to 104-25 following the Greece news. 10yr yields opened more than 2bps higher and are currently just shy of the morning's highs (1.6509) at 1.6472--holding ground for now, but not confidently stampeding back toward unchanged levels.

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