We survived yet another week where it seemed at times we were on the cusp of tumbling over the edge into an abyss. Monday through Wednesday had a bit of an “End of Times” feel to it as the world watched to see if Europe had actually given-up-the-ghost. The stronger nations of the world watched their interest rates plummet to historical lows, while the weaker nations witnessed their yields soar into the stratosphere. On Thursday, President of the ECB, Mario Draghi, soothed the market’s skittish nerves with words of encouragement that Europe did indeed possess the intestinal fortitude to save itself. Interest rates reversed course and with the additional news of the US economy growing a little stronger in the second quarter than expected, the market rode into the weekend with a much more positive tone than where it closed on Wednesday evening. The big question on everyone’s mind is whether this is just another of the many head fakes we have suffered through over the past 4-plus years, or are we really on the path to sustainable economic growth and stability?
For the week, the US Treasury 2-year note was up 4bps to 24bps (after dropping to 19.95bps, its lowest level since September 20th ); the 5-year note was up 8bps to 65bps (after falling to a new record low of 53.94bps); the 10-year note was up 9bps to 1.55% (after falling to a new record low of 1.3790%); and the 30-year bond was up 9bps to 2.63% (after falling to a new record low of 2.4405%). The average rate on a 30-year fixed-rate mortgage also fell to a new record low of 3.49%, more than 100bps lower than where we were a year ago (4.55%).
It was a similar story in Germany; the 30-year Bund fell to as low as 2.02% before ending the week at 2.27% (+21bps), the 10-year Bund tied its all-time low of 1.127% before finishing the week at 1.40% (+23bps), and the 2-year Bund dropped to its all-time low yield of negative -8bps before closing the week at negative -3bps (+4bps).
Spanish yields did an excellent job of encapsulating the rollercoaster ride we experienced this week. At its nadir, the Spanish 10-year note yield rocketed to an all-time high of 7.751% and seemed to be heading towards eight percent, but with the change of market sentiment, the yield settled the week at 6.74% (-53bps, week-on-week). This was the fourth time the 10-year eclipsed the seven percent handle, only to drop back through it.
The Italian 10-year note yield rose as high as 6.706% (its highest level since mid-January) before retreating back through the six handle to close the week at 5.96% (-64bps week-on-week).
The Euro this week dropped as low as $1.2043, which is less than its lifetime average of $1.2087, and the lowest level since $1.1877 in June 2010. One would then have to go back to 2006 to find the Euro as weak against the US dollar. Like most other markets, the Euro found strength in the later part of the week and finished at $1.2303.
With yields at or close to historical lows, a number of corporate issuers took advantage of the situation and raised a fair bit of debt at very attractive levels. FedEx raised $1 billion in a two-tranche transaction comprised of $500 million of a 10-year note and $500 million of a 30-year bond. This was the first time FedEx issued in the 30-year tenor since 1989 (think “Every Rose has Its Thorn” by Poison). IBM also came to the market this week with $1 billion 10-year note. The coupon on the note was 1.875% which makes it the lowest coupon ever for a US dollar corporate bond in the ten-year sector.
The Dow crossed the 13K mark this week for the first time since May and finished the week at 13,075.66, while the NASDAQ made a run at 3K closing at 2958.09.
The market will be keenly awaiting any news coming from the Fed as it concludes its regularly scheduled FOMC meeting on Wednesday as well as anything the Employment Report may hold in store for us when it is released on Friday. The expectation is for Payrolls to increase by +100K and for the Unemployment Rate to remain unchanged at 8.2%.
On a side note, there is a new book out on the financial crisis, “The Lost Bank: The Story of Washington Mutual” by Kirsten Grind, it should be an interesting read.
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