The results of the $38-billion two-year note auction came out at 1 p.m. EST. The auction drew a high yield of 0.922% allotted to 97.81% of bidders. The high yield was above the 'when issued' yield of 0.918% prior to the announcement. Initially, yields ticked up on the auction results, before noticeably dropping.

U.S. two-year yields are now up 8.0 bps to 0.82%, after falling 5.8 bps on the auction results to 0.778% at 2:20 p.m. EST. Five-year yields are now up 6.4 bps to 1.42%, 10-year yields up 4.2 bps to 2.17% and 30-year yields up 6.5 bps to 2.62%.

Sterling Stamos fixed income managing director Michael Kastner said the downturn in yields was not necessarily due to the auction, which he called decent.

"There's a lot of paper coming between now and the holiday and volume is pretty thin, there's not a lot whole lot of trading going on, so it's not really a surprise to me that we were seeing a little downside pressure after the auction. The auction was okay. The bid-to-cover was decent [2.13]. Yields are extremely low and yet we're still seeing some demand for paper, so it's not necessarily a bad thing. And, in fact, if you look at the two-year note it's actually bounced a little here," he said.

The Eurodollar March 09 contract is down 3.5 ticks to 98.78. The yield curve is flatter, with the 10/2-year spread down 4.0 bps to 134.30 bps.

The Canadian 10-year note is yielding 64.69 bps more than the U.S. ten year note.

Yields on two-year Canadian government bonds are down 2.7 bps to 1.24%, with five-year yields down 2.4 bps to 1.82%, 10-year yields flat at 2.81% and 30-year yields up 1.2 bps to 3.47%. The December 08 BAX contract is down 0.4 ticks to 98.25.

In Germany, returns on two-year German bonds are down 3.6 bps to 1.79%, with five-year yields down 6.8 bps to 2.36%, 10-year yields down 6.5 bps to 2.94% and 30-year yields down 5.0 bps to 3.50%.

Yields on UK two-year bonds are down 5.0 bps to 1.23%, with five-year yields down 5.0 bps to 2.60%, 10-year yields down 4.8 bps to 3.13% and 30-year yields down 6.2 bps to 3.76%.

Regarding stock markets, European stock markets closed in negative territory with the Eurostoxx down 29 points to 2024, the UK FTSE 100 down 38 points to 4249 and the German DAX down 58 points to 4639.

North American equities also closed in negative territory, despite a short climb off session lows in the lead-up to the 4 p.m. EST close. The Dow Jones industrial average closed down 59 points to 8520, the S&P 500 down 16 points to 872 and the Nasdaq down 32 points to 1532. They had session lows of 8372.02, 857.09 and 1503.70 respectively.

Nevertheless, FX strategists from CIBC World Markets forecast an overall upward trend in the S&P 500, for the medium term.

The Volatility Index (VIX) and the S&P 500 generally share an inverse relationship, they said. "The [volatility index], a measure of S&P 500 volatility and often referred to as a gauge of investor fear, is now on a firm path lower. We contrast the VIX with the FX market's version of a fear index: the Japanese yen," they wrote. "Now that the VIX has moved to its lowest level since early October, we now expect the Japanese yen to underperform both the dollar and euro going forward, if past relationships are to be maintained."

The Canadian dollar is up 0.47 to 73.95 against the yen, while the U.S. dollar is up 0.84 to 90.15 against the yen. The euro is up 1.44 points to 125.66 against the yen.

RBC Capital markets senior currency strategist Matthew Strauss said the yen underperformed today following comments from Bank of Japan Governor Masaaki Shirakawa. Shirakawa said he believed the U.S. is about to enter the worst recession it has seen in the post-World War II era.

Elsewhere, the euro is up 0.0034 to 1.3944 against the U.S. dollar, up 0.0077 to 1.6994 against the Canadian dollar and up 0.0089 to 0.9402 against the pound sterling.

The pound sterling is down 0.0082 to 1.4831 against the U.S. dollar and down 0.0082 to 1.8073 against the Canadian dollar.

The Canadian dollar is down 0.0031 to 0.8205 against the U.S. dollar (1.2187 USD/CAD). The U.S. Dollar Index is down 0.205 to 81.093.

West Texas Intermediate (WTI) crude oil is down $2.55 per barrel to $39.81. The front month gold contract at the Chicago Board of Trade is up $9.90 to $846.90 per ounce.

WTI crude oil had been on a downtrend since it fell $1.48 per barrel to $41.50 at 9:30 a.m. EST. Gold, meanwhile, has been one of the few commodities trading higher during the length of the session, a phenomenon CMC Markets analyst Colin Cieszynski tied to the People's Bank of China 27bp rate cut overnight, which lowered the benchmark one-year lending rate to 5.31%.

In other equities, Toronto's commodity-heavy S&P/TSX composite index closed down 252 points to 8300.

All data taken at 4:06 p.m. EST.

By Ryan Szporer, This email address is being protected from spam bots, you need Javascript enabled to view it

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