Why oh why, does the market rally on news of a bailout? The early indication from late Sunday night/early Monday morning was that market loved the news of the “Spailout”. As Monday progressed the market sobered up to the realization that an injection of 100 billion euro ($125 billion) into the Spanish banking system was not a “good thing”.
The net result of the “good news” of the Spailout was an increase in the funding cost for Spain as their 10-year note yield reached an all-time high of 6.998%. Whether one wishes to refer to the passing of the 7% level as a “Crossing the Rubicon” moment, or Model B9 warning “Danger, Danger Will Robinson”, history has taught us that “good things” do not follow a sovereign breaking this threshold.
The next European nation we are now concerned about is Italy. For the week, the Italian 10-year note yield was up +23bps to 5.998% after touching an intra-week high of 6.34%. Italy did cross the 7% level back in January before falling to as low as 4.68% back in March. The yield has been on a steady march higher since falling to that 2012 low.
Greece was pretty much a non-event this week as their 10-year note actually rallied by -176bps to fall to 27.17%, its lowest yield since May 15th. Portugal also rallied this week as its 10-year note fell by -53bps to 10.54%, its lowest level since early May. The French 10-year note ended the week relatively unchanged at +7bps to 2.58%, while the German 10-year Bund did sell-off a bit, up +12bps to 1.45%.
Here in the US, it was a bit of a risk-off week, as concerns about Europe and the US economy kept many investors either on the sidelines or adding safety rather than yield. For the week, the 2-year note was up 1bp to 28bps; the 5-year note was down 4bps to 67bps; the 10-year note was down 7bps to 1.57%; and the 30-year bond was down 7bps to 2.68%.
In the US, the equity markets ended the week on a positive note. The Dow was up +212.97 to 12,767.17 (+1.7%), the NASDAQ was basically unchanged at up +14.38 to 2,872.80 (+0.01%) and the S&P 500 was up +17.18 to 1,342.84 (+1.3%). Stocks in Europe did a little better as they were up by at least 1%. The FTSE was up +53.44 to 5,488.52 (+1.0%), the CAC was up +29.77 to 3,081.46 (+1.0%), and the DAX was up +87.31 to 6,218.13 (+1.4%). It was a similar story in Japan, as the Nikkei was up +110.06 to 8,569.32 (+1.3).
Oil finished the week relatively unchanged at $84.02/b, down -$0.30, though the intra-week low was $81.07/b. It was a very quiet week for the euro as it traded in a range of $1.244 to $1.267.
The US corporate bond market continues to be active as investors continue to have interest even at these very historically-low yields. Two-part deals were the preferred structure this week, as AT&T issued $2 billon in a two-tranche transaction comprised of $1.15 billion of a 5-year note and $850 million of a 10-year note; Symantec raised $1 billion through the issuance of $600 million of a 5-year note and $400 million of a 10-year note; and CBS raised $900 million with $400 million of a 5-year note and $500 million of a 30-year bond.
The election in Greece this weekend, the two-day FOMC meeting starting on Tuesday and the approaching quarter-end, will give us plenty to watch in the near future.
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