Foreign demand...

...for U.S. assets still massively strong. Net foreign purchases up by a large margin, and Treasury bond yields remain low in the face of healthy demand. Most pundits will ascribe this to one-off events like temporary EU volatility.

There is nothing temporary about the largest economic bloc in the world losing "reserve currency" status.

May 17 (Bloomberg) -- U.S. 10-year Treasury yields were near the lowest in more than a week amid concern European austerity measures will derail the economic recovery, increasing demand for the relative safety of government debt.

Two-year notes held near last week’s advance as a report showed New York manufacturing slowed. The dollar reached a four- year high against the euro after European Central Bank President Jean-Claude Trichet said the debt crisis may be worse than the Great Depression. European finance ministers meet in Brussels today, facing pressure to cut deficits fast enough to satisfy investors and police budgets once targets are met.

“There is no new data or fundamental news to provide much as far as the policy and economic landscape in Europe in concerned, so we are left to trade the prevailing themes of sovereign risk in Europe and the uncertainties in FX and equity markets.” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The continuing uncertainty in Europe puts a cap on how much the Treasury market can sell off.”

The U.S. 10-year note yielded 3.45 percent as of 9:11 a.m. in New York, according to BGCantor Market Data, little changed from May 14. It dropped as far as 3.38 percent, the lowest since May 7. The 3.5 percent security maturing in May 2020 rose 1/32, or 31 cents per $1,000 face amount, to 100 14/32. The two-year note yield was little changed at 0.78 percent, after a drop of 3 basis points last week.