Whether you’re a fan of Chubby Checker (The Twist and Let’s Twist Again), Dire Straits (Twisting by the Pool), or The Beatles (Twist and Shout), this week the Twist received more attention and air-play than any other time since 1961. The Fed’s announcement that it would be putting on a flattening trade (The Twist - selling short-date securities and buying longer-dated securities), as well as presenting a gloomier-than-expected economic forecast, was the impetus for a huge flight-to-quality, flight-to-the-U.S. and flight-to-the-long-end-of-the-curve trade.
The market pretty much sold everything that was not a long-dated U.S. Treasury (equities, gold, oil, credit). For the week, the two-year note was up 4bps to 21bps (after touching its all-time low yield of 14.31bps); the five-year note was down 7bps to 86bps (after touching the all-time low of 77bps); the 10-year note was down 26bps to 1.81 percent (having touched its all-time low of 1.70 percent); and the 30-year bond was down an incredible 47bps to 2.87 percent (having dropped as low as 2.78 percent – levels we have not seen since late 2008/early 2009).
On the shorter-end of the curve, three-month Dollar LIBOR has been up for eleven consecutive days, reaching 36.02bps, the highest level since August 2010; and the TED spread has widened to 36.2bps, its widest since July 2010. In addition, the Euribor-OIS spread is at 89bps, its highest level since March 2009.
The U.S. dollar (USD) strengthened this week against most other currencies. The USD reached $1.3385 versus the Euro (the strongest the USD has been since January), and the Dollar Index traded as high as 78.798, its highest level since February.
Germany also experienced a flight-to-quality as its government securities were also viewed as a safe haven. Hitting new record low yields were the German two-year note at 32bps, the 10-year note at 1.64 percent and their 30-year bond at 2.42 percent.
This was a week where the bad news far outweighed the good. The word "recession" entered back into our lexicon. Credit downgrades came fast and furious as the government of Italy joined Bank of America, Wells Fargo, and Citibank on the list of the recently downgraded. On the bright side, S&P raised the credit rating of Turkey’s local currency debt to investment grade at BBB-.
Commodity prices took quite a tumble this week as concerns about a global economic slowdown continued to grow. Copper traded as low as $3.215/lb, which is off -31 percent since its recent high in February. Gold has traded as low as $1,631.70/oz, and while still up over the past twelve months, the price is down -15 percent over the past two weeks. The price of oil dropped as low as $77.55/barrel, slightly higher than its 52-week low of $76.61/barrel and off -33 percent from its May high.
It was not all gloom and doom. The European corporate bond market saw its busiest day since January 2010 on Wednesday, with issuers such as Imperial Tobacco and RCI bringing $4.6 billion to market.
As we head towards the end of the third quarter, we may witness a bit of window dressing as investors spruce up their portfolios.
This article was excerpted from the latest issue of EconWatch, a summary of the latest economic data releases from the previous week.
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