Global Radar Screen – 7/1/11

Posted July 1, 2011 by CLeahey

[private][private]Overview—Bond Market Fireworks Before the 4th

The US bond market backed up dramatically before the long weekend. Investors initially protested about low yields regarding Treasury note auctions at mid-week. Then came the Chicago and national PMI data that suggested the US mfg nosedive was over and the US economy was not double dipping. And finally, it was the last week of QE2 so the largest purchaser in the Treasury market was at least partially exiting. Not a good week to be long “the bond.” The news regarding Greece was positive with successful votes in parliament regarding the austerity and reports that the European finance ministers meeting scheduled for this weekend had been downgraded to a conference call. This makes it more certain that the next euro12B payment (of the initial euro110B bailout package) would be ready by the July 15 default deadline. The big question appears to be the extent of the private sector participation in the second euro100B package needed to keep Greece afloat until 2013. The plans being bandied about include a “voluntary” extension of existing Greek debt. The plans appear to be better deals for the bondholders than for Greece, reinforcing our notion that the European policymakers are kicking the can down the road, effectively bribing Greece not to default yet. Nonetheless, the crisis may simmer down for the next couple of months, allowing investors to really bite their nails over the looming US debt ceiling August 2. We think negotiating will go down to the wire, with the possible end result a short-term extension to the end of 2011. This extension would include a $1 trillion “downpayment” (of already agreed upon cuts from the Biden group), allowing Congress and the president deal with the issuing of entitlement reform and tax (not tax rate) increases later this year.
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