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Bond Markets Weaker Overnight on European Data and Auction
Posted to: Micro News
Wednesday, May 21, 2014 9:18 AM

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Excessively low government borrowing rates in core EU countries such as Germany have a price.  While here in the US, our lofty-by-comparison 2.612% May 7th auction garnered 2.63 times as many dollars bid for each dollar of Treasuries up for grabs, a 10yr auction in Germany early this morning only managed to garner bids for 75% of the total. 

Even before that, meeting minutes from the Bank of England proved to be a slight drag on European bond markets and significantly stronger data in the UK contributed to the move.  Much in the same way we talk about "snowball selling," the combination of these events pushed German and UK bonds to technical levels that brought on more weakness.  All told, it was a rough night for European bond markets.

When things go poorly for European bond markets, there is almost always a negative implication for US Treasuries and last night was no exception.  From lows near 2.5% at 3:20am, 10yr yields rose to 2.53 before the domestic session began.  The 8:20am Treasury open (CME pit trading) saw traders lined up to sell, pushing yields nearly to 2.55 before backing off  just before 9am.

MBS are a bit removed from the European/US bond market interconnectedness and thus have lost less ground than Treasuries relative to yesterday's trading range.  Fannie 3.5s are down only 4 ticks this morning while 10yr yields ate down 9 ticks (in price), making for a 3.2bp increase in yield to 2.541. 

The day's only significant domestic event is the release of FOMC Minutes at 2pm.

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