Old World problems
To many analysts, the European sovereign debt crisis arguably is the number one factor driving the bond market. "It seems like every time we don’t get any bad news for a few days, the bond market starts to tick back down and yields start to rise in the 30- and 10-year. Then all of a sudden we get a headline or rumor [about Europe] and U.S. bonds spike back up," says Travis Rodock, senior futures analyst at eFutures.
Even though the issue first came to light nearly two years ago, the situation only has been exacerbated with Italian and Spanish debts closing in on 7% yields, a rate many analysts say is unsustainable. Additionally, credit rating agencies have made various downgrades on European debt and many still are on credit watch negative (see "Making the grade," below).
With few truly legitimate solutions having been presented, Rich Asplund, analyst at R.J. O’Brien’s Market Research & Trading, says the European crisis really is a wild card going into 2012. "It’s difficult to say if it might blow up into an all-out crisis, and I would put the odds of that happening at around 20%," he says. "My view is that it won’t get all that much worse than it is right now; we’ll be able to muddle through."
Kathy Jones, vice president of fixed income strategies at Schwab Center for Financial Research, says the trouble with the European debt problems is that the solutions are all political rather than financial, and the result likely will be a prolonged period of slow growth. "You have to be a political junkie to understand all the ins and outs. My view is that the most likely long-term outcome is a prolonged period of austerity and slow growth in southern Europe, and measures like we’re seeing recently from northern Europe to try and provide liquidity while that process works out," she says.
The result of the whole situation has been investors scrambling to find a safe haven to stash their money while the situation works itself out (see "Good as gold?" below). "There’s not a lot of places for people to go with their money if they’re looking for safe-haven assets right now," Rodock says. "It used to be that you had U.S. dollars, Treasuries or gold. Gold has started trading like a risk asset, so now you’re only really left with two choices: Treasuries or U.S. dollars. Although a lot of people say the U.S. isn’t in a great position either, at this point we’re the least dirty shirt in the hamper."
Rodock expects Treasuries to be well-supported going into next year. He sees the 30-year March T-bond staying in the 140-145 range with any new crisis out of Europe or China pushing it through 145 toward 150. He sees the same situation in the 10-year T-note with the March contract staying in a trading range of 129-131. He also expects Eurodollars to remain in a trading range until the Fed raises rates, something he doesn’t expect until at least the third quarter of 2012. In the March contract, Rodock sees stiff resistance around 99.56 with support down at 99.15.