This week was certainly chock-full of news. Between the two-day FOMC meeting, the 1Q GDP report, failing governments in Europe, and credit downgrades, it seems like we are experiencing our third consecutive spring of “now is the winter of our discontent”. After a first quarter of optimists beginning to outnumber the pessimists, this week certainly reinforced the scenario of a world where the US is growing, but at a substandard pace; Europe is in an economic freeze; and the BRICs and the Developing World are continuing to grow, but at a slower pace.
Safety and staying on the sidelines was the name of the game as both US Treasuries and German Bunds were the destination of choice for those focused on return of principal rather than return on principal. For the week, the 2-year Treasury note yield was unchanged at 26bps (its low of the week was 25bps); the 5-year note was down 1bp to 83bps (its low of the week was 81bps); the 10-year note was down 5bps to 1.93% (its low of the week was 1.88%); and the 30-year bond was unchanged at 3.12% (its low of the week was 3.06%).
In Germany, Bunds touched all-time low yields this week. The 10-year Bund was down -1bp to 1.70%, after falling to its all-time low yield of 1.633% earlier in the week; the 5-year Bund was down -3bps to 64bps, after being as low as 60.1bps, and the 2-year Bund was down -4bps to 10bps, after falling to its lowest yield ever of 7.5bps. Currently, the 2-year German Bund and the 3-month US Treasury bill are at parity. It seems that low yields are here to stay until we detect some kind of robust growth or some inkling of inflation developing.
The rest of Europe had an interesting week, starting with Spain which was downgraded by S&P. S&P lowered Spain’s long-term rating by two notches from “A” to “BBB+” and they also lowered their short-term rating from Tier-1 to Tier-2 (A-1 to A-2). Of interest though, the Spanish 10-year bond actually rallied a bit to finish the week -8bps lower at 5.88%, still flirting with that psychologically important 6% level. Speaking of the 6% threshold, Italy’s 10-year note yield has been creeping closer to that level, reaching as high as 5.784% before ending the week relatively unchanged at 5.64%. France is experiencing a bit of political uncertainly, but investors still view France as relatively safe, and rewarded their 10-year Oat with a -10bp rally, pushing its yield back down through 3% to 2.99%.
Staying with the improving bond yield theme, yields were lower in Portugal as their 10-year rallied -124 bps to drop from 11.73% to 10.49%. Even Greece improved this week as their 10-year note yield fell -79bps to close the week at 20.55%. The Greek 10-year was recently trading as high as 22.31% and the Portuguese 10-year recently touched 18.29% (back in late January).
The US equity markets improved as investors were more focused on earnings than economic developments and news out of Europe. The Dow finished the week up over 200 points to close at 13,228.31 (not far off its recent high of 13,29711; the NASDAQ was up 68.75 points to finish at 3,069.20; and the S&P 500 was back over 1,400, ending the week at 1,403.36, up 24.83 points.
On the corporate debt issuance front, Molson Coors was in market with a $1.9 billion three-tranche transaction comprised of $300 million of a 5-year note, $500 million of a 10-year note, and $1.1 billion of a 30-year bond. This was the first time Molson Coors has been in the US dollar market since 2007.
All eyes will be on the upcoming Employment report to be released on Friday May 4th. Will it help us divine where the economy is heading, or will it be another report that is neither fish nor fowl? The consensus is for an increase of +165k nonfarm jobs and the Unemployment rate to be unchanged at 8.2%.
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