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Bonds: Treasuries rally as wave of selling washes over Wall Street

By Alexander Bueso

Date: Thursday 11 Oct 2018

Bonds: Treasuries rally as wave of selling washes over Wall Street

(Sharecast News) - These were the movements in the most widely-followed 10-year sovereign bond yields:
US: 3.16% (-5bp)

UK: 1.73% (+1bp)

Germany: 0.55% (+0bp)

France: 0.90% (+1bp)

Spain: 1.61% (+1bp)

Italy: 3.51% (+3bp)

Portugal: 1.96% (-2bp)

Japan: 0.16% (-0bp)

Greece: 4.47% (-11bp)

Longer-term Gilts dipped on Wednesday, weighed down by gains in Sterling, but the real story in markets was across the Pond, with US Treasuries rallying after Wall Street was hit by a wall of selling in stocks.

Investors also noted the high yields and lower bid-to-cover ratios that the US tersury's two debt auctions fetched.

Ten-year US Treasuries initially fell back following the release of September producer price data showing a surge in fuel costs that some economists believed pointed to upside risks in the CPI figures that were scheduled for release the next day, pushing their yield up to 2.23%.

Yet while US wholesale prices advanced by 0.2% month-on-month in September, according to the Department of Labor, the year-on-year rate of change slowed from 2.8% in August to 2.6% for September (consensus: 2.7%).

In any case, share prices slid across the board as yields continued to move higher, with the Dow Industrials and S&P 500 clocking in with declines of more than three per cent and the tech-heavy Nasdaq Composite falling by more than four per cent.

Volatility also perked-up, sending the Chicago Board of Options Exchange's VIX volatility index over 40% higher.

Two-year Treasuries mimicked the move on the longer end of the interest rate curve with their yield falling back by five basis points to 2.85%.

Worth noting, an auction of $23bn 10-year Treasuries saw the highes yield since May 2011 with direct bidders falling to just 5.4% and the bid-to-cover ratio coming in at 2.39, which was down from an average of 2.55.

Another auction, of $36bn-worth of three-year Treasuries saw drew a yield of 2.898% with the bid-to-cover ratio falling to 2.56, its lowest since July.

European markets were also weaker, which helped rein in the rise even on Italian government debt, despite deputy Prime Minister, Matteo Salvini, telling state broadcaster RAI that he would "keep going straight on" with the 2019 budget and plans to partially unwind the 2011 pension reforms, which was known in Italy as the Fornero law.

Against that backdrop, ratings agency Fitch said Rome's budget plans underscored the risks that existed on the fiscal side.

Fitch also highlighted the tensions within the ruling coalition and its confrontational stance vis-a-vis Brussels.

The next regularly-scheduled ratings review by Fitch was set for the first quarter of 2019, with some analyss cautioning that other ratings agencies might soon weigh-in with their own warnings.

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