The domestic hours, like so many past examples, turned out to be relatively contained by the time European markets had their say. This time, they said good things to MBS and Treasuries, namely that there's still a bit of concern over the handling of the Cyprus bailout and a lot of concern over what headlines may come tomorrow from Italy. We can talk all about all sorts of probable considerations for today's bond markets, but at the end of the day (and at the beginning for that matter), it's been all about Italy.
Between stocks, Eurodollars, Bund yields (those are German 10yr notes), and Italian credit spreads, US Treasuries exhibited the highest degree of correlation to Italian credit spreads. In fact, both returned to their post-italian election levels for the first time since March 5th. This favoring of Italy is readily apparent in the chart. Teal and Green are Germany and the Euro whereas White and Yellow are 10yr Treasuries and Italian spreads. Forgive the Treasuries their early month trespasses higher after stronger economic data and focus on how they broke away from the other two in late February and again since mid-March, before ultimately surging lower much more quickly today (note that we have Italian spreads INVERTED so that LOWER=More Risk)
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