Treasury Closing Summary (May 14):

Credit jitters manifested along the curve, involuntarily enhancing the Fed's Twist Ops. Greek political disarray and JPM CDS fallout are keeping the financial sector off-balance and raising premiums at the short-end even as yields tumbled at the long-end. There was no data, leaving the focus on the machinations in Europe and the spillover to U.S financials. After the Euro Stoxx 50 plunged 2.3%, this knocked a couple percentage points off U.S. equities before they pared their opening losses.

The fractured political system in Greece continued to cast a pall over European stocks, with the Euro Stoxx 50 2.5% lower at one stage, with the banking index hitting multi-decade lows. This kept U.S. financial shares under pressure, along with resource stocks as commodities continued to hilt. There was also a mixed response to China's cut in reserve requirements after shares slid in Asia, with some fearing that it is a sign of decline rather than a proactive move. In a follow-up to the JPM loss on its European CDS loss, a management purge of 3 executives was confirmed today. Ally Financial's mortgage unit filed for bankruptcy. Yahoo bounced after its resume-challenged CEO was let go after 4-months. Avon said it was still mulling Coty's $10.7 bln merger offer and AMR is considering its merger options.

Euro$ interest rate futures traded sharply lower even as Treasuries outperformed amid credit contagion and liquidity evaporating from Europe, which spilled over to the U.S.. With financials trading under pressure again following Greece balkanization and JPM 's CDS shortfall, this has sponsored a "mini-reset" in the credit markets. The Sep 2012 contract sank 5-ticks before paring losses to 99.39, while the deferreds are 3-5 ticks lower out the curve. On the options side this has been accompanied by 10k in sales of Jun 2012 86/87 "call spreads", according to sources -- in line with the bearish tone. "Front-month straddle selling" also picked up over the course of the session, with the downturn in the price action apparently leading to some sales of volatility. At least 22k in sales of Jun 2012 95 "straddles" has washed through at various prices in three separate trades, according to floor sources.

The 2-year yield accordingly actually backed up a bp to clear 0.27%, while the 10-year yield dove from 1.84% to 1.77% before bubbling back up to 1.80% again. In Treasury options, some unwinding of bullish bond bets featured into the pointed rally on Treasuries. Sources cited a sale of 5k in Jun 2012 144 bond calls into the rally and were speculating that this might be position liquidation rather than a new position, given the firm undertone. Meanwhile, the cash bond yield has plunged from Asian highs near 3.01% to 2.93%. The 2s-10s spread narrowed to +151 bp.

Dollar swap spread widening picked up as contagion via European financials to the U.S. leaked through to the credit markets. The 2-year spread widened over 3 basis points just today from the +35 bp (mid) area to +37.75 bp. Likewise, the 10-year spread has lurched out 1.5 bp to +16.50 bp, before subsiding to +15.75 bp -- more than half way back to 2011 wides in Q4 near +24.0 bp set during the peak of the pre-LTRO credit-crunch in Europe that set up the Fed's 6-party swap agreements last year.

NY Fed bought $4.746 bln in 10-year notes in today's Twist. Maturities ranged from May 15, 2018 through February 15, 2020. The Street offered $14.154 bln. The Fed's Twist operations this week are mostly bullish for Treasuries with purchases outnumbering sales 3 to 1.

Europe's Stoxx bank index breached 2009 lows to make multi-decade low. Greek Syriza party leader said the goal is to keep the country in eurozone. Note, Eurozone finance ministers meet tonight amid Greek and Spanish crisis. The USD consolidated its gains over 80.0 amid risk aversion, forcing EUR under 1.2900 after German Chancellor Merkel suffered bitter defeat in NRW state election. Oil prices extended losses sub-$95 after Saudi called on OPEC to lift supply and equity losses.

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