Jan 16. Europe downgrades spur buying of US treasuries

–US yields simply continue to plunge, with ten year notes down 7 bps to 1.86%, as european countries were downgraded by S&P (France and Austria lose AAA ratings). Greek debt negotiations have broken down. And from ZH citing FT article: “Ms Merkel said she would consider calls from her party colleagues for legislation to bar institutional investors such as insurance companies from selling bonds when ratings were downgraded, or fell below investment grade.” If that’s not an engraved invitation to rush for the safety of US treasuries I don’t know what is…
–The curve flattened. Red/gold pack spread fell nearly 7 bps to 161.25. 2/10 at 164, down 6.
–At the Jan FOMC (one week from Wed) the Fed announces its first interest rate forecasts. Then there’s a meeting in mid-March. There is some speculation the Fed will announce another round of QE (buying mortgage securities) at the April meeting, as there is a press conference then, and twist operations end in June.
–Stocks fought back from early losses to close only modestly lower, as the relative safety of US equities and the prospect of more liquidity measures underpins support. (In a way, the decoupling of dollar strength/equity weakness indicates safe haven flight to US stocks, rather than the idea of robust economic performance).
From Prudent Bear: “After nervously following the euro tick for tick late in 2011, the marketplace has adopted a view that euro weakness is no longer something to fear. Indeed, the new analytical regime holds that a weaker euro is a welcomed consequence of the ECB having taken the type of decisive action required to finally resolve the European debt crisis. The ECB’s massive ($620bn) Long-Term Refinancing Operation (LTRO) has for now effectively contained the forces of crisis contagion. A weak euro is indicative of liquidity abundance supportive of European sovereign debt, the banking system and global risk markets more generally, at least according to the bullish perspective.”
–Baltic freight indices all continue to trend lower (see charts http://www.dryships.com/pages/report.asp ). In a world where every country hopes to export its way to stability, it’s not a good sign for world trade.

Posted on January 15, 2012 at 11:38 am by alexmanzara · Permalink
In: Eurodollar Options

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