Treasury Closing Summary (March 18):
Knee-jerk reaction to the Cyprus situation played out in the U.S. on Monday, mostly unwinding the cold snap of risk aversion overnight. Equities had been slammed in Asia and Europe after Cyprus summarily announced a tiered tax on bank deposits, then was unable to vote on the plan which will likely be revised while the banks there are on "holiday" until Thursday. After steep opening declines, stocks and yields in the states rebounded as the tax law appeared likely to be watered down at least for small depositors, helping to avert deeper panic in Europe from spreading.
Outside of the NAHB housing market index there wasn't much else for the markets to sink their teeth into other than the Cyprus headlines, followed by unwinding of this event. This was especially true heading into a 2-day FOMC meeting that appeared likely to sanction a slightly brighter economic picture, while keeping QE on track. The NAHB housing market index sank to 44 in Mar, below the forecast median, from 46 in Feb. The EUR rebounded from 1.2880 lows to 1.2975 on the view that the Cyprus levy would be diluted, as the eurozone attempted to ring fence the issue as peculiar to that Mediterranean Island-state. Yet UBS slashed their EUR forecasts near-term, also lowered target range on EUR-CHF.
Equities recouped the bulk of their opening losses even as Cyprus banks are set to remain closed until Thursday and officials there are likely to offer a revised plan to tap depositors to help fund the bailout with the IMF. According to reports the levy is likely to shift the burden from the common man down from 6.75% to 3.0% for depos over euro 20k (under 20k spared) and drive up the haircut for larger depositors over 100k (i.e. Russian depos). It's not clear that once Pandora's Box of confiscatory tricks is open all the evil spirits can be stuffed back in. U.S. equities recovered roughtly to unchanged, while the Euro Stoxx 50 cut its losses to -0.74%.
Bonds settled off their best levels as much of the overnight, knee-jerk rally in Treasuries dissipated, but fears over the Cyprus bank levy continue to underpin the market. The 2-year yield had fallen 2 bp to 0.24% before finding support. The 10-year yield was 5 bps lower on the session near 1.95%, having dropped nearly 10 bps to test 1.90% early. Contacts are discounting possible contagion from the impact of Cyprus. Nevertheless, worries that the eurozone has yet to solve its underlying problems and is only one mishap away from another blow up is sustaining risk aversion demand, not to mention various unintended consequences that could develop. In the meantime, the rekindled uncertainty over the eurozone financial sector and the U.S. sequestration budget cuts should keep the FOMC's QE measures in place, with no indication of tapering, at this week's policy meeting. The 2s-10s spread rebounded from +166 bp narrows to clear +170 bp again.
NY Fed Ops purchased $1.46 bln bonds from Feb 2036 - Feb 2043. Commodities were initially weighed by the Cyprus levy, but gold lurched over $1600 on the safe haven bid, as high as $1610 before ebbing.
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