The see-saw which is the US economy continued again this week as a weaker-than-expected Payrolls report put a bit of a damper on the recent positive narrative we had been witnessing. Concerns about the economy not being as robust as previously thought caused money to move in a classic “risk-off” trade and US Treasury securities were the beneficiaries at the expense of the equity market.
For the week, the US 2-year note yield was down -2bps to 22bps (as the market is pricing in no-move by the Fed until late 2015); the 5-year note yield was down -9bps to 67bps; the 10-year note yield was down -17bps to 1.68%; and the 30-year bond yield was down -26bps to 2.84%.
Prior to the Employment report, US equity indexes hit new highs earlier in the week. The Dow touched 14,684.49 before finishing the week at 14,514.50 and the S&P 500 reached 1,573.66 before closing the week at 1,546.92.
In Europe, the hangover from Cyprus continues, and investors are favoring safety over yield. The idea that the US economy may be growing at a slower pace than previously expected did nothing to improve the mood. Investors seeking safety continued to pile money into Germany and France. The German 30-year Bund yield fell -13bps to 2.09%; the 10-year Bund yield dropped -8bps to 1.21% (not far from its all-time low yield of 1.127%); and the 2-year Bund yield actually rose +3bps to end the week at +1bp. I guess the idea of locking in a guaranteed loss, lost some of its appeal this week. In France, the 10-year Oat yield fell -28bps to a new all-time low of 1.75%.
Investors were feeling more comfortable with Italian credit as the yield on their 10-year note fell by -38bps to 4.38%. It was a similar story in Spain as their 10-year note yield dropped -31bps to 4.75%. Even Greece saw their 10-year note yield fall by -29bps to 12.15%. Only in Portugal did investors take a wait-and-see approach as the yield on its 10-year note was basically unchanged at 6.36%.
Even with the uncertainty of the strength of the US economy, the issuance of corporate debt continues unabated. Wal-Mart issued a four-tranche, $5 billion offering consisting of $1 billion of a 3-year note (priced at UST +30bps, the tightest spread of any 3-year this year); $1.25 billion of a 5-year note; $1.75 billion of a 10-year note; and $1 billion of a 30-year bond. Home Depot was also in the market this week with a two-part $2 billion transaction comprised of $1 billion of a 10-year note and $1 billion of a 30-year bond.
With increased production (US crude stockpiles currently stand at 388.6 million barrels – think “Nothing Compares 2 U – by Sinead O’Connor), and the weaker Employment report, oil experienced its worst week in 6 months as West Texas crude dropped to as low as $91.91/barrel.
Gold, on the other hand, rallied after the report. After touching an almost ten-month low of $1,540.29/oz, gold rallied to close at $1,577.80/oz.
The market will be waiting for the next scheduled FOMC meeting on April 30th and May 1st to see if any change in Fed policy is on the horizon.
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