Well if this wasn’t the definition of a yo-yo kind of week, I don’t know what would be considered one. World equity prices moved up and down by hundreds of points, only to finish slightly down for the week; U.S. Treasury yields bounced down to historical lows only to ratchet back up. This week was full of “historical”, “unprecedented” and “never-seen-before” events and movements.
We came in on Monday morning, digesting the news that S&P had lowered the credit-worthiness of the United States by one notch from “AAA” to “AA+”. (It should be noted that both Moody’s and Fitch have reiterated their rating of the U.S. at “AAA”). The markets reacted by fleeing any asset-class deemed risky. Stock market prices were off five-to-seven percent, oil prices fell, Treasury prices rallied and the price of gold soared. It did not help matters that S&P finally got around to lowering the credit ratings of the GSEs on Monday afternoon. (Why they waited three days to do so remains a bit of a mystery). Fannie Mae, Freddie Mac, the FHLB System and the Farm Credit System all lost their coveted “AAA” status.
On Tuesday, we had the regularly-scheduled FOMC meeting. The Fed announced that interest rates would remain in their current low target range for the next two years, taking us to mid-2013. Treasury yields plummeted on the news, with the two-year and 10-year notes reaching all-time low yields. Equity prices subsequently rallied on the idea of low interest rates and made back most of Monday’s losses.
Wednesday brought us concerns about the creditworthiness of France, and the market reacted in a typical flight-to-quality manner. Equity prices again sold off, while money moved into U.S. Treasuries and gold. On Thursday, the market’s appetite for risk returned, and money moved out of Treasuries and gold into equities and oil.
On Friday, all the markets took a bit of a breather, with the stock markets rebounding, along with additional buying of Treasuries, while gold and oil were relatively unchanged.
For the week, the two-year note yield was down 10bps to 19bps (touching an all-time low yield of 15.68bps on Tuesday); the five-year note yield was down 29bps to 96bps (reaching a low yield for 2011 of 87bps and a three-week move of -55bps); the 10-year note yield was down 29bps to 2.25 percent (falling to an all-time low yield of 2.03 percent on Tuesday and a three-week drop of -74bps); and the 30-year bond yield was down 7bps to 3.73 percent (touching a 2011 low yield of 3.50 percent and a three-week fall of 55bps).
Of note is the current spread between the Japanese two-year security and the U.S. Treasury two-year, a mere 3bps. This is the tightest this spread has been since 1992 (think of the time House of Pain’s “Jump Around” was a huge hit).
At one point during the week, the price of gold hit an unbelievable $1817.60/oz, while the price of oil fell as low as $75.71/barrel. However, by week’s end the price of gold closed at $1742.60/oz and oil finished at $85.38/barrel.
Moving forward, I believe the market will continue to be on edge, searching for any insight as to whether the world’s economies are improving, declining, or merely treading water.