This week seems to be shaping up to be a watershed moment in what seems to be a more clearly defined narrative of the US economy. We may now be advancing out of the financial doldrums of the past several years, possibly into a period of sustained and even robust economic activity. Positive economic reports combined with arguably more favorable comments from the Fed and stronger than expected Bank Stress Test results were the basis for a rather significant flight of money from safety to higher-yielding assets.
In the US, the loser in this equation is the Treasury market (worst losing streak for Treasuries since 2006). For the week, the 2-year US Treasury note yield was up 5bps to 36bps (after reaching 39bps, its highest level since August); the 5-year note was up 22bps to 1.11% (after hitting an intra-week high of 1.15%); the 10-year note was up 26bps to 2.29% (after rising to 2.35%, its highest level since late October); and the 30-year bond was up 22bps to 3.40% (after hitting 3.49%., its highest level since early September).
The beneficiary of this re-allocation of money and re-balancing of risk tolerance was the equity markets as we witnessed many of the indexes reaching multi-year highs. The Dow Jones reached 13,289.08 which was its highest level since June 2007 and the NASDAQ reached 3,060.82 (crossing the 3K level for the first time since June 2001). This is also the first time the Dow has been over 13K, while at the same time the NASDAQ has been over 3K. In addition, the S&P 500 reached 1,405.82, which is the highest it’s been since May 2008.
In Europe, it was a similar story as equity markets rose while money left the safest securities such as German Bunds. The FTSE was knocking at the door of 6K as it closed at 5,965.58; the DAX broke through the 7K barrier to close at 7,194.33; and the CAC closed up, at 3,594.83.
In the European bond market, the Spanish 10-year note was off about 20bps to close at 5.20%; the Italian 10-year note traded weaker by 2bps to settle at 4.86%; the French 10-year Oat was off by 13bps to finish the week at 3.02%; and the 10-year German Bund sold-off by 26bps to close at 2.05%. In contrast, the Portuguese 10-year note actually rallied this week by 19bps to end the week at 13.66%.
Greece continues to be Greece. We now have to look at Greek yields through the prism of their recent restructuring. Greek 10-year bonds that closed last week at 36.55% opened Monday morning at 18.45% and finished better this week at 18.18%. It’s interesting to note that even with the restructuring; Greece is still trading cheap to Portugal.
With all the volatility and uncertainty in interest rates, it wasn’t surprising that corporate bond issuance couldn’t keep pace with last week’s record pace. Of note was Vodafone’s $1 billion 5-year note issuance.
The money-markets were back in the spotlight again this week, and it wasn’t just because of the potential new reforms concerning money-market funds that may be coming down the pike. With all the bullish news that was released this week, the market is now pricing in the Fed to start tightening interest rates sooner than previously expected. Looking at the futures market, a Fed tightening is now being priced into the September/October 2013 time period, rather than an early 2014 time period.
A Fed tightening prior to late 2014 wouldn’t necessarily be a contradiction to what the Fed reiterated earlier this week. The Fed has stated that it expects interest rates to stay extremely low through the end of 2014. They did not say they wouldn’t tighten before the end of 2014. It is interesting to note that these two statements are not mutually exclusive. By historical standards, short-term interest rates of 1%, 2%, or even 3% would be considered extremely low. Something to think about while watching March Madness.
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