Fear about Greece was the driving motivation this week as money fled in search of safety. Concerns about a possible Greek default or a messy departure from the Euro led to gains in US Treasuries and German Bunds at the expense of equities.
For the week, the back-end of the curve outperformed the short-end as investors braced themselves for a possible slower economic recovery than previously expected. The 2-year US Treasury note yield was up 3bps to 29bps (its low of the week was 26bps); the 5-year note was unchanged at 75bps (its low of the week was 70bps); the 7-year note touched an all-time low yield of 1.135%; the 10-year note was down 12bps to 1.69% (its low of the week was 1.69%, not far from its all-time low of 1.67% reached back in September); and the 30-year bond was down 21bps to 2.81% (its low of the week was 2.80%).
In Germany, it was another week of record low yields all along the yield curve. The 30-year Bund fell to 2.046%; the 10-year Bund fell to 1.396%; the 5-year Bund dropped to 46.3bps; and the 2-year Bund touched 3.1bps.
For the rest of Europe, there were more sellers than buyers as safety has become paramount. The French 10-year Oat was weaker by 7bps to close at 2.87%; the Italian 10-year note sold-off by 31bps to finish at 5.82%; the Spanish 10-year note also sold-off by 31bps to settle at 6.32% (creeping closer to the “dangerous” 7% level); and the Portuguese 10-year yield rose 90bps to blow through the 11% handle and is now back within striking distance of 12%, closing at 11.84% (a high rate but still substantially off its January high of 18.23%).
The Greek 10-year note touched another post-restructuring high yield this week of 30.44%, up 560bps this week, on top of the 422bps back-up of last week. The market has become consumed by the possibility of Greece leaving the Euro, and of the possible consequences such an exit would create. The only modern historical reference point for the break-up of a multi-national monetary union that could offer some guidance to such an event would be that of the Austro-Hungarian Empire (AHE) after its defeat in World War I.
What had been the AHE became 5 new states; Austria, Czechoslovakia, Hungary, Romania, and Yugoslavia. Five major issues confronted the new nations as their former monetary union dissolved: (1) the separation of outstanding AHE crowns into national holdings, (2) the creation of new national currencies, (3) the creation of new Central Banks, (4) the liquidation of the former AHE Central Bank, and (5) stabilization of the new national currencies. An exit by Greece from the Euro would create a number of operational issues that would need to be addressed, similar to the challenges faced by the former members of the AHE.
Reacting to all this uncertainty and fear, equity markets around the world sold-off. Here in the United States, all three major indexes ended the week lower; the Dow was off -448.35 (-3.5%) to close at 12,442.49, the NASDAQ dropped by -155.03 (-5.3%) to 2,778.79, and the S&P 500 fell by -58.11 (-4.3%) to settle under 1,300 at 1,295.22. Even all the buzz and excitement related to the Facebook IPO couldn’t help push the market to the upside.
It was a similar story in Europe, as the FTSE, CAC and DAX were down all week. The FTSE finished at 5,267.62 down -5.5%, the CAC was down -3.9%, just north of 3K at 3,008.00, and the DAX dropped -4.7% to 6,271.22. In Japan, the Nikkei was down -3.8% to 8,611.31.
Commodities also suffered a volatile week. Oil prices were lower for a third consecutive week to close at $91.48/b (-5.1%), after being as low as $90.93/b. The price of gold also dropped this week, falling to as low as $1,526.70/oz (not far from its 52-week low of $1,494.80), before rallying back to settle at $1,591.90/oz.
Even though the amount of Corporate Debt issued dropped off dramatically with all the market volatility, there were still a number of marquee deals brought to market. Inmet led the pack with their $1.5 billion eight-year security, followed by Kellogg’s $1.45 billion, three-tranche transaction. The Kellogg deal was comprised of $350 million of a 3-year note, $400 million of a 5-year note, and $700 million of a 10-year note. Toyota Motor Credit Corp was also in the market with $1 billion of a 5-year note.
The markets are expected to stay uncertain and volatile for the foreseeable future, stay tuned for further developments.
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