DAILY MARKET COMMENTARY
March 11, 2014
The news event of the day didn’t really make that big of an impact. The 3-year auction was awarded at a yield of 0.802%. This was about where the note was trading in the when-issued market at auction time. The dealers ended up with 54.6% of the sale (above their normal take), the bid/cover was an average 3.25 times, and the foreign bid stood for about 30% of the sale. All in all, I’d give it a B. As we head home for the day, the note is offered at 0.79%.
The 2-year closed at 0.37%, the 5-year at 1.62%, and the 10-year at 2.77%.
The Dow was mostly on the downside today, although there were a few minutes where green was flashing. At one point the Dow was lower by -93 points and managed to close with a loss of -67 points. In percentage changes, both the S&P and the NASDAQ suffered larger retreats.
When equities were near the lows of the day, the bond market was looking at its best bid, but as equities pulled out of the dive, bond prices eased back in sympathy.
Tomorrow is another slow news day on the economic front with only the mortgage application index on tap. However, the Treasury sells 10-year notes at auction; so we’ll have something to talk about. This is a re-opening of February’s sale and it settles on Friday, so the auction tranche is essentially the same as the current issue. The 10-year auction in February was awarded at 2.795% which is pretty close to where the sale will be awarded tomorrow.
The FOMC meeting starts a week from today which means we have entered the blackout period for Fed speakers. This my favorite time when we don’t have to listen to these people pontificate one way then vote another.
This week is also the 5th anniversary for the bull market in stocks that began on March 9, 2009. Since then stocks have risen by an excess of 150%. The same couple of weeks that saw stocks hit their low point of the Great Recession in 2009 saw the 10-year yield in a trading range of 2.50% to 3.0%. Wait a minute. That sounds awfully familiar. Voila! We are locked in that same trading range with stocks up a huge amount. Not that I expect the same pattern to unfold that occurred in 2009, but once equities got a foothold in March 2009 they rallied by about 30% by June 2009. Over that same stretch the 10-year yield leapt to 4%. That 4% high water mark turned out to be the top for rates over the last 5 years. The Fed had launched QE1 in late 2008, but rates jumped anyway once stocks started rallying. The Fed stopped QE1 in June 2010 and the 10-year retested 4.0%. When the Fed resumed with QE2 rates drifted lower. The 10-year yield bottomed at 1.40% in the summer of 2012 as Europe appeared to be flying apart (only to be saved by the famous Mario Draghi speech on July 24, 2012, “we will succeed”). Rates retested the 1.40% area in May 2013 only to experience the “taper tantrum” last summer. Yields have been pushed around by a myriad of forces only to wind up back where we started in early 2009.
I took a little time for this history lesson because there is not much going on yet this week. There is little economic news to digest (and we wouldn’t know what to do with it anyway in this weather-dominated environment). The Ukraine pot continues to simmer, but nobody really thinks this will turn into actual warfare between the East and the West. The Russian/American linkage is too complete. Russian spacecraft shuttle our astronauts to our space station, for heaven’s sake. (I’d hate to be an American astronaut stationed up there when the Russians decide to cut off the ferry service. Shades of “2010: Odyssey Two.”)
Yesterday saw bond prices flat line and this pattern looks to be bleeding over into this morning as well. The 2-year is opening at 0.37%, the 5-year is 1.63%, and the 10-year is 2.79%. We spiked to these yields in a few minutes after non-farm payrolls last Friday and have gone sideways since.
The only item on today’s docket is the 3-year note auction. Current guesses have the awarded yield at 0.81%. Last month’s 3-year was awarded at 0.715% which was close to the 6-month average award of 0.72%. (Seems like rates have been more volatile than that, right?) So today’s awarded level should be of interest to investors. Tomorrow’s 10-year and Thursday’s 30-year might pose more difficulty, but we’ll just take them one at a time. To complete my earlier theme, while the 10-year was in the 2.75% range in early 2009, the 3-year was somewhere in the 1.25% range. The incessant QE activity since have certainly taken a toll on the 3-year note yield. It is also a reminder of how steep the yield curve remains.
Equities took a hit yesterday morning, but recovered to post only modest losses. Equity futures point to a small gain when we get going today. Equities rallied a bit in Asia last night and are pretty flat in Europe today. The Russian stock market is getting whacked again, returning to the lows of the last four years. The deterioration in Russian stock prices is supposedly one of the moderating forces on Putin these days. Putin’s oligarch buddies can’t be too happy with his current maneuvers.
Director of Investment Sales
Jeff's comments and insights, based on his professional expertise and the knowledge he has acquired observing the U.S. economy and global markets, are offered as his own personal observations and opinions, and not necessarily reflective of those held by SunCorp, our board or member credit unions. Please do not respond to this message as this e-mail address is un-monitored.
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