Just like the Washington Redskins, the markets cooled off a bit this week. While there is still plenty of optimism to go around and the future is looking brighter, it’s just a bit more tempered. Now that we are fewer than seven weeks to go before the US elections, there is a general feeling the markets may in stuck in a bit of a holding pattern until November 7th. Of course, plenty of surprises may still await us over the next month and a half, so we will have to see what unfolds.
After quite a back-up over the past two weeks, buyers saw a bit of an opportunity to jump back into US Treasuries. For the week, the US 2-year Treasury note yield was up 1bp to 26bps; the 5-year note was down -4bps to 67bps; the 10-year note was down -11bps to 1.75% (still up +20bps over the past three weeks); and the 30-year bond was down -15bps to 2.94% (still up +27bps over the past three weeks). The 2-year/30-year curve flattened by -16bps to stand at +268bps (still wider by +23bps over the past three weeks).
On the mortgage front, both the thirty and fifteen-year fixed-rate product fell to all-time historic lows. The average 30-year mortgage touched 3.49% and the 15-year mortgage dropped to 2.77%. The Fed’s recent announcement of QE III, provided quite a bit of support to the mortgage market with the Mortgage/Treasury spread falling to its tightest level ever at +61bps (a drop of -34bps from last week).
It was a similar story in Germany this week. The 30-year Bund yield was -11bps lower at 2.43%; the 10-year Bund fell -11bps to 1.60%; and the 2-year Bund dropped -6bps to 3.6bps. It was a very quiet week in France, as the 10-year Oat was up +2bps to 2.28%.
It was an uneventful week in Spain as the 10-year note yield was lower by -3bps to finish the week at 5.76%. The Spanish 10-year has now fallen -199bps since late July. The Italian 10-year note ended the week +3bps higher to close at 5.05%. During the week, the note was as low as 4.92%.
The situation in Greece continues to improve. Their 10-year note yield continued its recent trend lower, falling by another -86bps to drop back into the teens at 19.93%. We are now back to yields last seen in late March. Reversing is recent trend, the Portuguese 10-year note backed up +49bps to settle at 8.58%. The yield on this note was higher by +300bps (11.58%) as recently as late July.
Corporate bond issuance continues unabated. Both absolute and relative yields continue be at or near all-time lows. Novartis led the way this week with a $2 billion two-tranche transaction comprised of $1.5 billion of a 10-year note and $500 million of a 30-year bond. In this low interest rate environment, it makes perfect sense that we continue to see borrowers issuing debt on the longer-end of the maturity curve. Vodafone was active with its own $2 billion two-tier deal consisting of $1 billion each of a 5-year and 10-year piece. Ford was also in the market with $1 billion of a 10-year note.
As we come into quarter-end, we may see a bit of window-dressing as investment managers adjust their portfolios. Then it’s off to the beginning of the fourth quarter, which could end up being quite exciting on both the economic as well as political markets.
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