This article was excerpted from the latest edition of EconWatch. Read the newsletter.
The market had the feeling of being on a teeter-totter this past week, as general positive feelings about the U.S. economy were counter-balanced by geopolitical concerns, specifically in Ukraine and Gaza.
For the week, the two-year yield was up 1bp to 49bps; the five-year note yield was up 1bp to 1.68 percent; the 10-year note yield was down 1bp to 2.47 percent; and the 30-year bond yield was down 4bps to 3.25 percent (its lowest level since June 2013). The yield curve continued to flatten this week, as the spread between 30-year/five-year Treasuries fell to as low as 156bps (the narrowest margin since February 2009).
Overseas, the flight to safety continues as the German 10-year Bund yield touched a near all-tRead the newsletter
me low yield of 1.136 percent (UST 10-year less 133bps); the French 10-year Oat yield fell to an all-time low of 1.534 percent (UST 10-year less 94bps); the Spanish 10-year yield dropped to an all-time low of 2.54 percent (UST 10-year plus 7bps); and the Italian 10-year yield reached a near all-time low of 2.71 percent (UST 10-year plus 24bps).
The U.S. equity market held its own through most of the week, but gave up a bit of the ghost as the situations in Ukraine and Gaza appeared more dire on Friday; and the thought of being overly long going into a weekend was too much to stomach. The Dow dropped back under the 17k level, but is still up 8.85 percent over the past year; the NASDAQ continues to trade near its multi-year high (up 23.26 percent over the past 12 months); and the S&P 500 hit a new all-time high of 1,991.39 (up 16.92 percent over the past year).
Between a weak EU economy and gunfire in Ukraine, the Euro weakened against the U.S. dollar touching an eight-month low of $1.3438. The Euro/USD exchange rate is expected to continue to weaken as conventional wisdom holds that the interest rates in the U.S. are expected to rise, while European rates are expected to at least maintain their current levels if not continue to drop further.
Russia continues to try to support its currency as its Central Bank raised interest rates in a surprise move this week. The one-week auction rate was increased by 50bps from 7.50 percent to 8.00 percent. This was the third rate hike since March and interest rates are at their highest level since late 2009.
The big news out of the SEC this week concerned money market funds (MMF). For the first time ever, prime institutional MMFs will have a floating rather than fixed price associated with them, while government and retail funds will remain largely exempt from the new rules. Prime funds will have two years to comply with the new rules. To help mitigate the burden of the changes, the Treasury Department and the IRS agreed that investors will only have to account for gains/losses once a year and the IRS will also waive its “wash-sale” rule. The markets will be keenly focused on this week’s GDP and employment reports.