Euro Bonds, Keep Currency On Defensive

The Euro zone continues to see pressure in the bond market, which in turn is creating a defensive Euro currency.  Besides Greece (+54 basis points), Ireland 10-year bonds have been the second worst performer in the periphery this past week (+31 basis points) as markets focus on the ongoing costs of recapitalizing the Irish banking sector.  Last week, the Irish government got permission from the European Commission to pump another EUR24.5 billion into nationalized Anglo Irish Bank, about 10% more than the EUR22 billion that Fin Min Lenihan had signaled earlier.  Ireland has been the poster child for successful austerity measures, but markets are getting jitters about the sheer size of its problems.  If Ireland cannot pull through by doing all the right things, how can markets get bullish about Greece, Portugal, and Spain?  This is one reason why markets have turned negative on the periphery again.   Greek 10-year spreads to Germany are making new post-EFSF highs around 833 bp today.  Greek yields are up 23 basis in absolute terms today, but other spread widening in the periphery is coming from Germany outperforming (10-year yields down 6 basis points on the day).  The euro bounce ran out of steam around 1.2870, and given the renewed pressures on the periphery,  euro gains are going to be limited near-term.  Levels to look out for on the downside are 1.26 (50% retracement level of the euro’s June-August rally).  There is also a band of minor support around 1.2730-40 (lows from July and August).  Monday’s currency high could be a good place to short the Euro, with Friday’s high as a stop level.