Treasuries Continue to Find Support Amid Global Uncertainty-- July 12, 2012

Global bond yields continue to fall, and prices continue to increase as investors seek safe havens amid the global uncertainty. A lack of action out ofEuropehas caused investors to stuff cash in “safe” and liquid assets such as treasuries and currencies across the globe. The ECB reported this morning that overnight deposits that banks have placed with the ECB declined by € 484 billion, which is a significant decline. One week ago the ECB lowered their benchmark interest rate 25 bps to 75 bps, from 100 bps, and they also lowered the interest rate paid to banks for Euro’s held on deposit with the ECB to zero. As one might expect, banks are moving the money out of the ECB deposit facility, but they don’t appear to be lending this money into the real economy and taking risks. Instead, this money is being used to purchase “safe” and liquid assets, such as Swiss 2-Year bonds, German, Finnish and Austrian bonds. The money is fleeing to the safety of the core of the EU, and we can see this in the near negative yields on short-term 2-Year bonds.

In a 10-YearU.S.Treasury auction yesterday, the demand as measured by direct bidders was a record high. Direct bidders took down 45.4% of the auction, which is the most for any offering ofU.S.government coupon securities on record, according to Bloomberg. The notes drew a yield at auction of 1.459 percent, according to Bloomberg. The bid-to-cover on the auction was 3.61 versus a 10 auction average of 3.07. We will wrap up Treasury auctions today with a 30-Year Bond auction, and it will be interesting to see if direct bidders step up and take down a significant percentage of this auction.

One thing is certain, in an environment where global growth is slowing and uncertainty in the EU is the norm, demand for “safe” liquid assets will remain intact. Look for continued support in the 10-Year Notes and 30-Year Bonds.