Sentiment improved as Spain managed to sell its bonds above target, the Fed might announce additional easing measures to boost the economy and investors were positive that a new Greek government could be formed on time. Wall Street gained with the DJIA and the S&P 500 indices rose +0.75% and +0.98% respectively. In the commodity sector, the front-month contract for WTI crude oil rose +0.92% while the equivalent Brent crude contract dipped modestly. Gold price dropped although the situation in the Eurozone eased temporarily.
The treasury in Spain raised 3.36b euro in 12- and 18-month bills, mildly above the target of 3B euro. The yield, however, soared markedly. The interest rate on the 12-month bills rose to 5.07% from 2.98% previous auction of the same kind on May 14 while that on the 18-month bills jumped to 5.10% from 3.30% previously. The economy minister Luis de Guindos complained as he attended the G-20 meeting that the government believed that "the current situation of punishment in the markets, what we're suffering from today, doesn't correspond with the efforts, or the potential, of the Spanish economy ...This is something that will have to be recognized in the coming days and weeks". Bond yields, however, eased a bit after the "successfully" auctions with Spanish 10-year bond yields falling -12 bps to 7.04% and Italian 10-year bond yields dipping -16 bps to 5.92%.
In Greece, Pasok leader Venizelos assured that a new coalition government would be formed by midday on Wednesday. Yet, he mentioned that "the most critical matter isn't the form the government takes but the national negotiating team which will seek the best possible revision of the loan accord", suggesting the uncertainty in the debt-ridden Greece and the 17-nation Eurozone remained there.
At the FOMC meeting on Wednesday, the Fed would likely take some actions, i.e. by extending operation twist which would expire by the end of the month. The Fed may extend operation twist for six months with US$50B per month by selling short-term Treasuries with remaining maturities of three years or less and buying longer-term assets including Treasuries and MBS. The advantage of the move is that the balance sheet would remain unchanged. The extension would provide the Fed several more months to gauge market developments and evaluate whether an outright purchase is needed. In addition, the Fed may also delay the timing of keeping interest rates to exceptionally low levels from late 2014.
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