After a yield spike of 40 basis points since the launch of QE2 (see chart below), the U.S. is due to sell $16 BN in 30-year bonds tomorrow.  This is interesting in itself, but after a week of increased bond market volatility in Europe’s periphery, all eyes will be on the Portugal’s bond auction.

The country is set to sell EUR 750 MM to EUR1.25 BN of its 4.20% October 2016 and 4.80% June 2020 bonds at Wednesday’s auction.  This is the country’s first bond auction since Europe agreed to create a permanent mechanism to deal with fiscal problems in the euro zone and has raised concerns as to whether core countries,  such as Germany,  will continue to support those in trouble.

Greece successfully sold Euro 390 MM of 26-week treasury bills today at a yield of 4.82% with a bid-to-cover of 5.15.  Rumors that the ECB was buying Portuguese and Irish government bonds today caused spreads in both sovereigns to tighten as much as 40 bps.   Portugal has the highest concentration of its sovereign debt held by foreigners and thus the most at risk of capital flight and rollover problems (see chart).  Tomorrow should be interesting to see how much the ECB will be forced to participate.   Stay tuned!