The Week Ahead: Dynamic Duo of FOMC and Eurodrama Back in Action

In the week just passed, US bond markets spent almost all waking moments attempting to consolidate in a range that included the weakest levels in almost a year for US Treasuries and since before QE3 for MBS.  The impetus for the quick visit to recent yield highs came courtesy of the previous week of losses, capped by the stronger-than expected Employment Situation.  Post NFP uncertainty, generally strong economic data, and the need to accommodate the week's Treasury auction cycle, helped keep yields elevated.

Bond market participants knew a few things as the month of March began.  They knew the ECB announcement was coming up.  They knew other central bank announcements (Japan, England) could play supporting roles.  They knew Italian politics would be muted until mid-to-late March.  They knew NFP was coming up and they knew the following week was an auction cycle.  

In light of all that "stuff," the fact that the yellow line in the chart below seems to noticeably break away from the other two lines seems to make an eerie sort of sense.  Even as the Euro and German Bunds only turned a mild corner early in the month, US Treasuries shot up more convincingly after failing to break through the incredibly important 1.84 technical level.  Although the motivations for underperformance of Treasuries vs Bunds were understandable, the extent of the divergence is curious.  

Did Treasuries just get "popped and dropped?"  Yes and no...  There was very likely some extra defensiveness built into levels heading into the weekend, but this morning is all about Cyprus.  Compared to Bunds and Euros, Treasuries were on the other side of the playing field, much closer to their highest yields of the year whereas Bund yields (or Eurodollars) were much closer to their lowest.  Since the Cyprus panic suggests a move lower for all three, Treasuries were the most "offsides," and thus appear to be scrambling the most in the chart above (snapped ahead the European open.  Check back at the MBS-MID-DAY recap for an update).

Cyprus still has to vote on the proposed bank levy/bailout program that's causing the gyrations above.  It's hard to see a risk-positive outcome here.  If they approve it, it sends a message to European depositors that their cash isn't safe in the periphery's banks.  If they reject it, Cyprus could default.  Combined with whatever political headlines can be mustered out of Italy, the tone is largely dictated by Europe in the first two days of the week.  Wednesday brings the FOMC Announcement, Forecasts, and Bernanke press-conference.  If, through some miracle, we haven't been treated to a rousing display of market moving guidance by then, Thursday brings a robust day of domestic economic data ahead of a silent Friday (the Friday before Spring Break for many).