Well, after much hope that we had turned the corner in regards to the European Debt crisis and the U.S. employment situation; both hopes were sadly crushed by week’s end. The U.S. employment report on Friday was much worse than expected with a gain of only 18k jobs (the smallest increase in nine months), while the unemployment rate ticked up to a 2011 high of 9.2 percent. The U.S. jobs market has now basically come to a standstill. Looking at the remainder of 2011, it’s hard to see what will be the impetus to significantly improve the employment market or the U.S. economy in general. We seem to be stuck in an infinite loop of +2.0 percent GDP growth and 9.0 percent unemployment.
In Europe, the situation seems to be murky at best. To paraphrase Mr. William Shakespeare, “A default by any other name is still a default”, which is pretty much S&P’s opinion of the Greek restructuring plan currently being floated. The idea of an “extend and pretend” strategy has failed to impress the market. The concern is that the situation is deteriorating and now Italy is being included in the group of failing economies. (The term PIIGS continues to ring truer and truer, so it seems).
Let’s look at the current damage. The Irish two-year note and 10-year bond touched record high yields of 16.74 percent and 13.02 percent, respectively; the Portuguese two-year note and the 10-year bond also touched record high yields of 18.28 percent and 13.09 percent, respectively; in Greece the two-year note backed up to a record 30.40 percent and the 10-year bond is at 17.05 percent, and in Italy the two-year note is at 3.61 percent and the 10-year bond is at 5.38 percent, a nine-year high.
Here in the U.S., it has been a rollercoaster of a ride in Treasuries over the past two weeks. After touching the low yields of 2011 two weeks ago, we experienced quite a sell-off in Treasuries as the news out of Europe seemed encouraging. With the weakening position of Europe and the dismal employment update here, U.S. Treasuries rallied for the week, (though not back to the lows of 2011).
For the week, the two-year note yield was down 9bps to 38bps; the five-year note yield was down 22bps to 1.57 percent; the 10-year note yield was down 17bps to 3.01 percent; and the 30-year bond yield was down 11bps to 4.28 percent.
A couple of marquee debt deals were priced of late: Amgen raised $3 billion through a three-trache transaction. They issued $750 million of a five-year note, $1 billion of a 10-year note, and $1.25 billion of a 31-year bond. Bank of America raised $2.5 billion with the issuance of $2 billion of a five-year note and $500 million of a three-year FRN.
The CP market shrank during the week, after reaching a recent 18-month high, contracting by $20 billion to $1.210 trillion. Similarly, after touching a nine-month high, the ABCP market shrank by $3 billion, to $421.9 billion outstanding.
Somewhat lost in the news this week was that a number of countries/blocs increased their official interest rates. China raised their one-year rate for the third time this year by 25bps to 6.56 percent. China continues to try to strike the balance between healthy and inflationary growth. The ECB, as expected, raised their overnight rate for the second time this year by 25bps to 1.50 percent. The ECB has the interesting challenge of trying to balance the stronger economies of Germany and France versus the weaker economies of the PIIGS. Outside of the euro, Sweden raised its interest rate for the seventh time in 12 months by 25bps to 2.00 percent.
All eyes will be on Europe and the United States in the days and weeks ahead.