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By Rom Badilla, CFA – Bond Trader and BondSquawker:

With the European Union drawing closer to a bailout agreement for Greece, news refocused back to the U.S. for the time being in both bonds and stocks.

U.S. Treasuries rallied across the curve after strong investor demand from today’s auction.  In the last of four auctions this week, the Treasury sold 32 billion of 7-Year notes that drew a yield of 3.21 percent.  The yield was better than the survey of primary dealers by 2 basis points.  In addition, the bid-to-cover ratio, which is gauge of demand, came in at 2.82 versus the average from the last 10 auctions of 2.76.  Apparently there was strong interest from foreign central banks as participation from Indirect bidders was higher than the last auction.  Indirect bidders purchased 59.5 percent of the notes versus 41.9 percent in March.

To add to the rally in bonds, supply in the 2nd Quarter is expected to decline according to a survey conducted by the Securities Industries and Financial Markets Association (SIFMA).  The survey suggests that Treasury issuance will $351 billion in bonds, notes, and bills which is less than the $483 billion of issuance in the 1st Quarter of this year.

With strong demand at the auction and less supply in the near term, U.S. Treasury yields declined across the curve.  The 2 and 5-Year declined by slightly more than 2 basis points to close at a yield of 1.00 and 2.48 percent, respectively.  The yield on the aforementioned 7-Year pressed even further and finished the day at 3.16 percent.  The long-end declined 4 basis points as the 10-Year and Long Bond closed at 3.72 and 4.59 percent, respectively.

10-Year Treasury Yield – Intraday Chart

Stocks rallied due to strong corporate earnings.  The S&P 500 recaptured some of the loses from Tuesday’s decline caused by the PIIGS contagion.  The S&P 500 soared 15.42 points or a 1.3 percent gain to close Thursday’s session at 1206.78 which is just shy of the most recent high of 1217.28.  The Volatility Index aka VIX declined back below twenty by dropping 12.5 percent to 18.44.

The Dollar Index dropped 0.4 percent to 82.08 while the Euro rallied to 1.3233, an increase of 0.3 percent.