The Week in Fixed Income: A Wild Ride Across the Globe
8/5/2011
by Patrick Faul, VP, Head of Credit Research, Calvert Investment Management, Inc.
When fear is on the rise in global markets, it is a near certainty that U.S Treasuries will be the hapless beneficiary. Consider that U.S. Treasury prices rose considerably for the week amid widespread fears of a European financial catastrophe. As Treasury prices rose, the yield on the 30-year U.S. Treasury fell, from 4.12% last Friday to 3.77% through midday this Friday. The words, "all-time low", were bandied about frequently.
The lengthy debate on increasing the U.S. debt ceiling brought widespread attention to the difficulties facing the U.S. economy. It was widely noted that fiscal stimulus — one of the tools that could be used to combat a sluggish economy—would be removed from the government's toolkit as part and parcel of a debt ceiling agreement. The market answered the actual extension of the debt ceiling with a decided shrug.
The debt ceiling agreement left $1.5 trillion in further spending cuts to be agreed upon by October 1. Expect renewed focus on this far-reaching debate and the potential impact of any spending cuts throughout September.
Like spectators at a tennis match, attention then quickly shifted from the U.S. debt burden to that of Italy and Spain. The time-tested solution for any overleveraged country: build more printing presses and debase the currency is no longer available to Spain and Italy; that is a convenience they forfeited when they joined the euro. Europe is struggling to devise end-runs around this problem. Greece, Ireland and Portugal have already given up a great deal of fiscal autonomy in exchange for bailouts. Talk of a possible fiscal union designed to complement the monetary union, has been on the lips of political commentators. It is difficult to imagine European politicians willingly giving up the power of the purse strings to bureaucrats in Brussels (or Berlin for that matter).
A glimmer of hope for the U.S economy came on Friday as the labor department reported a stronger-than-expected jobs report and a slight dip in the unemployment rate. This jobs report came at the end of a week laden with weak economic data that revived talk of a double- dip recession and QE3.
The wary fixed income markets are still left pondering the repercussions of a possible downgrade of the U.S. sovereign rating by Standard & Poor's. Moody's and Fitch have sidelined themselves for the moment.
The Swiss and Japanese moved to weaken their strengthening currencies. The Swiss, surrounded by euro countries, have seen their currency appreciate almost 16% this year against the euro. That gives the Swiss a holiday to enjoy much cheaper German imports but it's still rough going in terms of competing for exports with euro countries.
Credit markets suffered in reaction to the flight to safe havens. The Barclays Capital U.S. Credit Index widened, from 141 basis points to 146 basis points. The Barclays Capital U.S. High Yield Index fell, from $102.92 at Friday's close to $101.42 at the close on Thursday.
Municipal markets have followed Treasury markets with strong performance this week. A much-watched sale of Montgomery County, Maryland general obligation bonds went well and came at a level 10 basis points lower than the AAA index. Montgomery County is adjacent to the District of Columbia and highly reliant on federal government spending.
This commentary represents the opinions of its authors as of 8/5/11 and may change based on market and other conditions. Their opinions are not intended to forecast future events, guarantee future results, or serve as investment advice. Accounts managed by Calvert Investment Management, Inc. may or may not invest in, and Calvert is not recommending any action on, any companies listed.
The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither Calvert Investment Management, Inc. nor its information providers are responsible for any damages or losses arising from any use of this information.
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