By Rom Badilla, CFA – Bondsquawk.com

U.S. Treasury yields spent much of the session higher fueled by positive economic data before selling off late in the day. Both the 5 and 10-Year outperformed the rest of the yield curve as yields declined slightly more than 3 basis points and closed at 2.06 and 3.26 percent, respectively. The yield on the Long Bond declined just a shade below 3 basis points to 4.18 percent. The 2-Year was unchanged and finished at a yield of 0.77 percent.

The LIBOR-OIS spread, which is an indication of banks’ willingness to lend, inched to 31 basis points, an increase of one. Similarly, the spread on the fixed rate leg of interest rate swaps, which is a gauge of counterparty risk, increased a basis point over the weekend to 46.

The U.S. credit markets were wider on the day. The BofA Merrill Lynch High Yield Master Index increased 6 basis points to a spread of 704. The spread on the U.S. Corporate Index closed at 205 basis points over comparable maturity Treasuries, a rise of 3. The U.S. Bank Index increased a basis point to 275.

Credit risk is rising for European peripheral countries after Fitch’s downgrade of Spain on Friday. Yields on the longer end of the curve are either approaching or surpassing the highs seen before the announcement of ECB intervention.

The yield on 30-Year Greece bonds are now at 8.21 percent which is 64 basis points higher from the lows, post ECB support. The high in yields of 8.59 percent occurred the Friday before the announcement on May 7th.

Spain should have told the ECB to not even bother and save themselves all this trouble since their yields have surpassed the highs on the long end of the curve. The yield on Spain’s 30-Year reached recent highs today of 5.31 percent. The yield posted a post ECB support level of 4.98 percent. The yield prior to the announcement on May 7th was at 5.19 percent.

Comparatively, Germany’s 30-Year declined to 3.35 percent from 3.52 percent as of May 7th.

Stocks tumbled in a late session selloff. The S&P 500 dropped 1.7 percent to 1070.71. The Nasdaq closed out at 2222.33, a decline of 1.5 percent. The VIX increased close to 11 percent to 35.54.

The Dollar Index rallied 0.2 percent to 86.795 while the Euro dropped 0.6 percent to 1.2229. The British Pound advanced 0.8 percent to 1.4651.