This article was excerpted from the latest edition of EconWatch. Read the full report.
If one watched just the closing levels for U.S. Treasuries on a week-to-week basis, one could fairly conclude that the past week was reasonably uneventful – au contraire! For the week, the two-year yield was down 2bps to 47bps; the five-year note yield was down 1bp to 1.67 percent; the 10-year note yield up 1bp to 2.48 percent, and the 30-year bond yield was up 3bps to 3.28 percent. By all appearances, a very pedestrian week, but the devil is in the details!
Earlier in the week, the two-year yield spiked to 58bps (its highest level since May 2011); the five-year yield traded in a range of 1.65 percent to 1.79 percent; the 10-year yield varied between 2.46 percent and 2.61 percent; and the 30-year yield ranged from a low of 3.23 percent (its lowest level since June 2013) and a high of 3.35 percent. The 30yr/5yr yield spread fell to its narrowest level since January 2009 at +149bps, before widening back out to 161bps by week’s end.
What caused all this volatility? Treasuries sold-off after the second quarter GDP report was released this past Wednesday. The report came in significantly higher than expected (+4.0 percent versus a consensus +2.9 percent). The fear was that the increase in economic activity would force the Fed’s hand to raise interest rates sooner rather than later to stem the tide of potential inflation.
Those fears were somewhat allayed with the release of Friday’s employment report, which was positive, but not earth-shattering. Payrolls came in at +209k versus a consensus of +233k and the unemployment rate ticked up +0.1 percent to 6.2 percent, while the consensus was for no change at 6.1 percent.
The stock market sold off in the latter half of the week as a laundry list of geopolitical and economic challenges (Ukraine, Gaza, Portugal, Argentina, etc.) encouraged investors to seek safety over return. The Dow is now down over 600 points from its recent all-time high but it is still up 5.75 percent over the past year; the S&P 500 is down about 60 points from its recent all-time high but it is still up 12.99 percent over the past 12 months; and the NASDAQ is off over 125 points from its recent 14-year high, but it is still up +18.36 percent over the past year.
The flight-to-quality trade continued in Europe this past week, as the German 10-year Bund yield fell to a new all-time low or at least since 1989, (think “Every Rose has Its Thorn” by Poison) as the yield touched 1.109 percent (U.S.T 10-year less 137bps). In France the 10-year Oat yield also dropped to a new all-time low of 1.497 percent (U.S.T 10-year less 98bps); the Spanish 10-year yield dropped to an all-time low of 2.451 percent (U.S.T 10-year less 2bps); and the Italian 10-year yield reached an all-time low of 2.626 percent (U.S.T 10-year plus 15bps).
Commodity prices were weaker this week as oil (WTI) dropped to a four-month low of $97.09/barrel and gold traded as low as $1,281.00/oz.