The U.S. 2-Year Yield Soon to Rise Above Germany

For the past few months, Goldman Sachs has had a problematic trade on its hands.

Marc Chandler submits:One of the most important developments in recent days has been the sharp backing up of global interest rates, spurred primarily by indications that, contrary to expectations, U.S. fiscal policy is in play again beyond simply preventing the expiration of the 2001 and 2003 tax cuts. While the rise in U.S. rates has helped keep the dollar supported, we are concerned that two-year German rates have risen even faster than two-year U.S.

Marc Chandler submits:German Finance Minister Schauble has written a letter earlier this week to the ECB, IMF and euro zone finance ministers that appears to be putting the proverbial cat among the pigeons. The latter has been leaked to the press. He seems to be tacking a course that runs into direct opposition to the ECB, IMF and France. Until recently Schauble seemed to argue that a restructuring of Greek debt needed to be avoided because of the systemic risks. However, the letter suggests a different assessment.

Marc Chandler submits:The European Financial Stability Fund ((EFSF)) is planning its first issue this week. Talk was of a €3-5 bln of a 5-year issue priced 8-10 bp on top of swap rates. This would imply a yield of about 2.85%, compared to a 2.32% German 5-year yield. The EFSF bonds are expected to be priced tomorrow.

Andrew Wilkinson submits: Just a tad of risk aversion this morning is keeping bonds afloat and yields down. The picture seems to repeat itself across major market centers. Words from the likely future vice chairwoman at the Fed provided reassurance that the rates are likely to remain on hold adding a further fillip to bond prices. Tensions in European bond markets remain a dead weight on short interest rate implied yields.

Edward Harrison submits:Marc Chandler had some good comments on the Greek debt crisis this morning. The main issues, he believes, are contagion and uncertainty, especially as it pertains to sovereign debt infecting the private sector and vice versa. He said:

By Marc Chandler: (Click to enlarge) We have often noted how well the U.S.-German 2-year interest rate differential tracks the euro-dollar exchange rate. This Great Graphic, we composed on Bloomberg, shows the dollar against the euro in white and the 2-year interest rate differential between the U.S. and Germany in yellow.

Marc Chandler submits:"Turn Around Tuesday" unfolded in Asia and early Europe as equity markets gain (after the 1% loss in the U.S. on Monday) and the euro and dollar bloc currencies rallied. However, news that Greek opposition leader Samaras opposed additional austerity measures, but would support state asset sales, is proving challenging. This stalled the euro's momentum and prompted some retracement of its gains. Support is seen ahead of $1.4050.