You know we have ventured into interesting territory when a week that includes a day where the Dow Jones was down over 500 points and the 30-year U.S. Treasury bond yield was down over 36bps could be considered a relatively calm week, but there you have it.
With Monday through Wednesday relatively quiet, the markets were rocked substantially on Thursday as concerns about slower world-wide economic growth and the stability of Europe’s governments and banks reared its ugly head. Equity prices around the world dropped quite dramatically, government bond yields fell, gold prices soared, and oil prices dropped.
U.S. Treasuries were again the beneficiary of a flight-to-quality trade. (So much for the market giving much weight to S&P’s recent downgrade of the U.S.). For the week, the two-year note yield was unchanged at 19bps (given the Fed’s recent statement about keeping interest rates low for the next two years, there is little expectation of the two-year note moving much from here); the five-year note yield was down 7bps to 89bps (reaching an all-time low yield of 79bps and a four-week move of -62bps); the 10-year note yield was down 18bps to 2.07 percent (falling to a new all-time low yield of 1.97 percent and a four-week drop of -92bps); and the 30-year bond yield was down 34bps to 3.39 percent (touching a 2011 low yield of 3.37 percent and a four-week decrease of -89bps). The U.S. 30-year bond was also supported by the belief that there is little inflation on the horizon.
While a good number of debt issuers have come to market over the past two weeks to take advantage of low interest rates on both an absolute and relative basis, the spotlight was definitely on one company, and that was Disney. It came to market with the lowest coupons ever on five-year, 10-year and 30-year corporate debt. Disney issued $750 million of a five-year note with a coupon of 1.35 percent, $750 million of a 10-year note with a coupon of 2.75 percent and $350 million of a 30-year bond with a coupon of 4.375 percent.
Europe was in the spotlight again as the market continues to question whether the governments of Europe possess the intestinal fortitude to actually face and resolve the challenges that confront them. There is much concern that the European banks could face steep losses and that their access to liquidity may become restricted.
As is often the case, when there is a loser, there is a winner on the other side of the trade. In Europe, that winner is Switzerland. The Swiss 10-year note hit a new all-time low yield this week of 85bps, that is about 120-125bps LOWER than similar U.S. or German debt. The yield on Swiss two-year note remains in NEGATIVE territory for the third consecutive day. It is quite an extraordinary situation when investors are willing to lock in an investment with a negative initial return.
Gold and oil prices moved in opposite directions this week. Gold touched a new all-time high price of $1,881.40/oz., while oil fell to as low as $79.17/b during the week.
This Friday, Fed Chairman Ben Bernanke will be speaking in Jackson Hole, Wyoming (one of the best places in the U.S. to ski) at the Kansas City Fed’s annual symposium. The market will be watching to see if the Chairman offers any insight as to what the Fed might be up to with regard to a potential QE3.
Be safe out there.