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Week ended 5th August, 2011 – Treasuries & Bonds this week.

US has avoid a federal debt default but markets were not satisfied with this. After lot of drama S&P downgraded US, we might have a different picture if official news would come in early hours. Now S&P warned they may have more in future if things are not in the same line as politicians have agreed to do it. From the early days of the week Treasury Yields dropped due to political frustration and weak US manufacturing report.


2-Year Treasury
5-Year Treasury
10-Year Treasury
30-Year Treasury

Italian & Spanish Bond Yields hit fresh Euro-era highs this week as worries over Euro-Zone debt crisis and world economic slowdown. But later period Bond Yields ended lower as central banks stepped into the Bond market.
Italian prime minister vowed to impose austerity faster than planned, this moves pave the way for ECB to lower the borrowing cost by buying Bonds in secondary markets. This week Swiss National Banks cut interest rate to curb soaring Swiss FRANC, which helped the dollar to surged and Bond Yields fell on it.
This week everyone is talking about US debt but some news from Euro-area are not good, like official GDP figure from Italy and forecast from Spain suggest the growth remains slows. Spain has target of selling 3.5 billion Euro Bond but they able to sell only 3.3 billion Euro this week.

Coming week

This week bond price posted one of strong price gains, by contrast stock markets suffered one of their biggest weekly decline. The movement of  Treasuries were strange to me, because when there are uncertainties regarding some financial instrument, it is quite natural for that to drop in price. But here it is quite different, as most of the Treasury Yield dropped during the week. Investors were pretty much sure that Moody’s and FITCH, as they will not downgrade now. But during whole Friday investors were doubtful about S&P, as there were many rumors and a sell-off came in Treasuries in Friday. Now if this continues then we can expect more sale-off in coming days. Last week I guessed some rise in Yield but I was wrong as Treasury market did not react much about the debt news, but Friday’s moves show that we can have more.

For 5-Year Treasury Yield 1.027 support is still intact and on the upside 1.40 is the resistance.
10-Year Treasury Yield has a support at 2.064 level, on the upside it has resistance at 2.80 level. In Friday 10 & 30 Year Treasury Yields came-up from the lowest level of the year. For 30-Year Treasury Yield 3.55 is good support and on the upside it has initial support around 3.75 and then at 3.95 level.

It is pretty early to say whether this downgrade will reduce the demand of US Treasury, especially to foreign countries like ChinaNow it is not necessary that due to this downgrade the borrowing cost for US will rise in future, because there are instances like Japan where it reduced in past after downgrade. I don’t like these rating agencies but if investors react on the news of downgrade in small economy like Greece then it is quite understandable that how they may react on US. It is hard for a country to regain this AAA rating soon as there are previous instances like Canada.
Situation can be difficult for those funds which hold significant amount of Treasuries and  worst for those who borrowed against those Treasuries. Because they may have to pay more to their lenders. I wonder what will be the effect on these funds if these Treasuries suddenly starts to drop in value in coming days.

NOTE :  Please see the disclaimer below this blog .


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