MacroScope

A solid bid for U.S. 10-year notes the Treasury sold on Wednesday appeared to defy the notion that credit investors would balk if talks to cut the U.S. deficit stall, or are separated from the more technical drive to raise the U.S. debt ceiling by Aug. 2.

Demand for the 10-year Treasury note sale on Wednesday was “strong,” said Ian Lyngen, government bond strategist at CRT Capital Group, helped by some pre-auction price reductions.

The robust bid for U.S. debt argued that euro-zone debt issues remained the most immediate concern for investors.

Euro zone plans for a leaders’ summit on a second Greek rescue were thrown into doubt by Germany on Wednesday. raising the possibility of a new pressures on the bloc’s high debtors. Europe’s pain was the Treasury’s gain.  As Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank, put it:

The debt ceiling is a worry, but the other factors are more imminent.

Testimony by Federal Reserve Chairman Ben Bernanke also sounded supportive for Treasuries in the longer run, even if a rally in stocks led to some selling in bonds. Bernanke hinted that the Fed is actively considering some form of QE3 if the economy weakens much further.  Argued Jack Ablin, chief investment officer at Harris Private Bank:

My initial reaction was ‘QE3 here we come’. We suspected the Fed would come up with some sort of QE3 in light of the disturbance surrounding the sovereign debt markets.