The week here in Washington, D.C. started with a burst of excitement as our rookie quarterback, RG III, lead the Redskins to victory in New Orleans, but it was the Fed’s announcement of QE III, that truly took the market by storm. The news that the Fed would be purchasing $85 billion/month of fixed-rate securities on an open-ended basis, and that they would be targeting interest rates to be exceptionally low into 2015, gave a shot of adrenalin to the equity and commodity markets, while making longer-dated fixed-income securities less attractive. This may be the sea-change moment we have been waiting for to really get the US economy moving. Only time will tell if this is true.
For the week, the US 2-year Treasury note yield was unchanged at 25bps (the announcement of ultra-low yields until 2015, has put a ceiling on this maturity); the 5-year note was up +7bps to 71bps (up +12bps in the past two weeks); the 10-year note was up +20bps to 1.86% (up +31bps in the past two weeks); and the 30-year bond was up +27bps to 3.09% (up +42bps in the past two weeks and the highest level since May). The 2-year/30-year curve steepened by +27bps to stand at 284bps (wider by +39bps in the past two week).
It was a similar story in Germany this week, as investors moved out of safety in search of yield. The German 30-year Bund yield was up +20bps to 2.54% (its highest level since March); the 10-year Bund was up +19bps to 1.71%; and the 2-year Bund was up +6bps to 10bps. The French 10-year note was relatively quiet, with its yield only up +5bps to 2.26%. With a current pick-up of +55bps between the German and French ten-year notes, money shifted from Germany to France this week.
The Italian 10-year note yield broke through the 5% barrier, to fall as low as 4.95% (its lowest level since March) only to sell-off at bit to finish the week at 5.02% (-4bps for the week). There was a bit of unease about the situation in Spain towards the end of the week, and their 10-year note settled at 5.79% (up +16bps). The Greek 10-year note continued its recent rally as its yield fell another -83bps to finish the week at 20.79%. The Portuguese 10-year note was practically unchanged at 8.09%.
It was another busy week for corporate debt issuers. Walgreens was in the van this week with their $4 billion five-tranche transaction. The deal was comprised of $550 million of an 18-month FRN, $750 million of a 2.5 year note, $1 billion of a 5-year note, $1.2 billion of a 10-year note, and $500 million of a 30-year bond. Also in the market this week was Merck with a $2.5 billion offering made-up of $1 billion each of a 5.5-year and a 10-year note and $500 million of a 30-year bond.
The US equity markets responded to the news of QE III by soaring to multi-year highs. The Dow closed the week at 13,593.37 and the S&P 500 settled at 1,465.77, both the highest levels since December 2007. The NASDAQ finished the week at 3,183.95, its highest level since November 2000 (think Creed’s “With Arms Wide Open”).
We will be watching to see if the markets can maintain their positive momentum in the second half of September.
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