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It would have taken a non-domestic dark horse market mover in order to stir US bonds to much action ahead of today's FOMC, and Europe has been happy to oblige. There is a veritable feast of European events driving sovereign debt yields lower. Here are the relevant bullets, mostly in order of important and timing.
- Minutes from the Bank of England meeting hinted at the need for QE and rate cuts. This made for the first major rally move in Europe overnight, and accounted for the drop from 2.05 to 2.035 in US 10yr yields overnight
- Bigger motivation for Europe's rally was a flat-out ridiculously strong German Bund auction. All you need to know is that it was the lowest-yielding Bund auction on record, yet it attracted a near-record amount of demand. We just don't see this kind of jump in demand at Treasury auctions. The recent average bid-to-cover ratio for Germany was about 1.25. Today's auction skyrocketed to 2.37! So again, lowest yield ever + biggest demand since 2002 (when the Euro had just been rolled out) = safe to say that European bond market demand is past the point of unhealthy, but still totally logical considering ECB purchases.
- Speaking of ECB purchases, although European bond trading opacity prevents us from being sure, it's suspected that the ECB was a big buyer earlier today. Second and third-hand reports suggest sellers were having a hard time keeping inventory on the shelves. It's like a run on the bank, but in reverse.
- Sweden cut rates to negative 0.25 and announced 30 billion Krona in bond buying. Sweden doesn't matter all that much in and of itself, but added fuel to today's fire.
- Finally, there's a bit of Greek drama about as German leaders say a near-term solution to Greece's March funding issues isn't in the cards for this week's EU Summit.
All told, the benchmark for European bond markets rallied from just under 0.3 to just under 0.2 in a few short hours. US bond markets reluctantly followed and that reluctance is manifesting itself in a determined bounce higher in yield on the first break in the overseas action. In other words, Treasuries and MBS have been selling-off ever since the European rally paused. That makes sense considering domestic bond markets were already looking like they were where they wanted to be heading into today's FOMC events.
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