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Jobless Claims Schmobless Claims. Portugal Moving Bond Markets... Wait, What?
Posted to: Micro News
Thursday, July 10, 2014 9:08 AM

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Yes, I know it violates our sense of market-watching propriety, but Portugal is moving markets.  Normally I'll be the first to dismiss "smaller foreign country drama" as inconsequential.  When it comes to non-EU states, that will remain mostly true (the only exceptions being situations that involve some risk of US Military involvement).

But when it comes to problems that are strictly financial, the only smaller foreign countries that tend to matter are those in the Eurozone.  The only reason they matter is that their actions affect the entire Eurozone currency.   This was why Greece, Italy, Spain, Ireland, and even Cyprus caused problems in the past.

You know how we've been in roughly a 16 bp range in 10yr yields for well over a month? (2.50-2.66%).  Portugal 10's moved 15 bps in ONE HALF HOUR this morning, and in the hour immediately preceding that, had moved roughly 20bps in the opposite direction.  Before that, there was another slower move of 20bps in the opposite direction again.  So that's 3 separate moves of over 15bps in the past 8 hours.  Things are volatile.  (Background on the situation HERE).

The type of movement seen overnight looks exactly like the stuff we were seeing every night in mid-2012.  It's a simple formula: Peripheral EU country's issues cause that country's sovereign debt yields to spike and "core" sovereign debt (read: Germany) yields to drop, which in turn pulls US Treasuries along for the ride.  All this is easily seen in the chart below (note: the white line representing Portugal's 10yr yields has been inverted to illustrate the correlation.  So when it's lower on the chart, it's at higher yields.  Portugal yields don't get an axis in this chart, but the high end of that spike in the morning is at 3.81% and the low at 7am is at 4.01%--a 20bp move).

[Image or graph removed from email. View full article with images]

Conclusion: Jobless Claims schmobless claims.  They came in at 304k vs 315k forecast, but who really cares? 




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