We certainly experienced what can only be described as a see-saw week. It was no surprise that we watched the US equity markets slump on Monday in response to last Friday’s Employment report (most of Europe was closed due to the Easter holiday). US stock indexes were off about -1%, while the US Treasury market was only slightly better, the muted response in Treasuries due to the fact they had had the opportunity on Friday to response to the weaker-than-expected Payroll number.
On Tuesday, concerns about a slower economy and fresh fears about Europe only served to accelerate the flight from risk. US stock indexes fell another -1.7%, while US Treasuries rallied further. It was a similar situation in Europe. Wednesday saw a bit of a reversal as equities were up and Treasuries gave back a bit of their recent gains. Thursday witnessed continued buying of equities with the Dow up +1.4% heading back towards 13K, the NASDAQ back over 3K and the S&P 500 knocking at the door of 1,400. On Friday, we swung back down as the US equities were off one to one-and-a-half percent, and Europe was off one to almost two-and-a-half percent.
For the week, the 2-year Treasury note yield was down 4bps to 27bps (its low of the week); the 5-year note was down 5bps to 85bps (its low of the week); the 10-year note was down 7bps to 1.98% (its low of the week); and the 30-year bond was down 9bps to 3.13% (having been as low as 3.12%).
Fears flared up again about the viability of the Euro-zone as we currently know it. For the Majors, Spain was the loser this week. The Spanish 10-year was off by an additional 26bps at its worst this week, cracking the 6.00% barrier at 6.02% before dipping to 5.98%. Italy was weaker this week but to a much smaller degree. The 10-year Italian bond was off as much as 28bps, before improving to a loss of just +7bps to end the week at 5.52%. The French 10-year Oat was perceived as an avenue of safety and its yield dropped as low as 2.88%, before selling off a bit to close at 2.95% (down -4bps on the week). Germany continues to be the destination for ultimate safety on the continent as they were the beneficiaries of all-time low yields on their securities. At their low yields this week, the 10-year German Bund fell to 1.639% (almost besting the 1.636% on September 23rd), the 5-year Bund fell to 61.7bps and the 2-year Bund fell to 9.1bps which was the first time the German 2-year note has ever been lower than the Japanese 2-year note.
The Portuguese 10-year note was off again this week with its yield peaking at 12.80%, before ending the week at 12.56% (a 32bps loss). The Greek 10-year note experienced quite a bit of volatility as its yield magnified the mood swings of the market. At its worst the 10-year peaked at new recent-high of 22.43%, and at its best the yield dropped to 20.98%. The security finished the week at 21.13%, at a gain of 67bps on the week.
The following are just a few additional observations I made during the week, much of which was spent in airplanes and in airports across the United States. The sale of Swiss 6-month bills actually drew a negative yield as investors were willing to lock-in a known-small-guaranteed loss rather than be exposed to the possibility of a greater loss. Natural gas fell to a ten year low of $1.959/mBTU. Natural gas is at its cheapest price since January 2002 and its price is off nearly sixty percent over the past twelve months. It will be interesting to see how the lessening of natural gas prices flows into wholesale and retail electricity prices.
For those of you with a bit of an economic bent, please review the most recent US Beveridge curve. It currently reflects an interesting phenomenon that even as the number of job openings has increased; the unemployment rate hasn’t dropped as fast as it has in the past. Is this a temporary anomaly or has there been a permanent shift in this relationship?
Finally, it was a rather rough week for the Money Market Fund industry as both Fed Chairman Bernanke and Boston Fed President Eric Rosengren continued to take aim at the industry as being too risky and in need of further regulation.
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