Notes From Underground: A Dog Day of Summer

The news was sparse and the rally was easy: DOLLAR UP, SPOOS UP, TREASURIES STEADY … HO HUM. It won’t stay that way tomorrow as we will have the 10-year note auction, followed by the release of the June FOMC Minutes an hour later. At 3:10 p.m. CST, Ben Bernanke will take center stage at the National Bureau of Economic Research (NBER) and it will be about monetary policy as the FED “basks in the light” of its 100-year anniversary. The speech takes place in Cambridge, Mass. and a Q&A follows the prepared text. Markets will be on edge to see if Chairman Bernanke pulls back some of the talk on tapering or at least responds to the recent volatility of rate rises in the long-end of the market.

The DOLLAR rose this morning purportedly on ECB executive board member Asmussen’s comments about the support for the central bank’s use of the “extended period” language … this was NONSENSE. Later in the day (after the European close), S&P downgraded Italian debt and it is hard to believe that some “traders” may have had the news early. The EURO dropped on the headline release of the downgrade but within an hour regained the price levels that it traded prior to the “shocking” story.

In my opinion, the more important story of ECB angst and EURO weakness is shown in the 2/10 Portuguese yield curve. The GRAPH of the Portuguese 2/10 reflects a funding problem for the government. Even as 10-year rates have risen during the last six weeks, TWO-YEAR NOTE YIELDS HAVE SOARED DURING THE PAST FEW DAYS MOVING THE CURVE MORE THAN 170 BASIS POINTS, which has resulted in a SIGNIFICANT flattening. This is reminiscent of what took place last JULY when it was the Spanish, Italian, Portuguese and Irish yield curves that flattened dramatically in quick fashion and President Draghi delivered the famous, “whatever it takes” remark.

Portuguese 2/10 Yield Curve

We will watch to see if the Portugal situation begins to spread to the other peripherals, but this is a warning that things are amiss in Europe and on the boil. The EURO has been weak during the past five days. If the Portuguese curve begins to steepen, let’s watch to see if it would bring some relief to the recent EURO selling.

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One Response to “Notes From Underground: A Dog Day of Summer”

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