Market commentary

What is the third largest bond market in the world behind Japan and the U.S.? If you guessed France, Germany or the UK, you are incorrect; Italy ranks third. Think about that as you read sovereign debt crisis headlines coming from Europe. This quote from the Economist: “If Spain has long been considered too big to fail, then a full-blown Italian debt crisis would be cataclysmic. The country’s bond market is the third-largest in the world, after America’s and Japan’s. That has been seen as a source of a comfort: bond investors find it hard to avoid a market that big and liquid. But it is also a source of widespread financial infection.”
European Union leaders are holding an emergency summit Friday in hope of containing the widening financial crisis as spreads on Italian bonds reached near record levels.
The effect of this on U.S. markets is a continued flight to the relative safety of U.S. Treasuries, and after Monday’s steep sell off, stock markets are flat. The yield on the 10 year note fell as low as 2.89% early this morning and is currently trading at 2.91%.

With world debt markets in turmoil and U.S. leaders stalemated over deficit reductions, the U.S. Treasury begins another week of debt auctions today with $32 billion 3 year notes, followed by $21 billion 10 year notes and $13 billion 30 year bonds on Wednesday and Thursday, respectively.

Later today the Fed will release the minutes from its last FOMC meeting. Expect volatility to continue.