By Benjamin Streed
January 28, 2013
Last week was a bit surprising for the U.S. Treasury market; better-than-expected jobless claims figures on Thursday did little to change the “risk off” sentiment we’ve seen since the turn of the New Year. Initial and continuing jobless claims were the lowest since January and July 2008 respectively, and both marked considerable declines from their less volatile ten-period moving averages of 365k and 3233k. Much of the response could have been a result of the plethora of concerning and downbeat news emanating from around the globe. Sample headlines from Bloomberg included the following: Apple Tumbles After Weakest Profit Growth Since 2003, Nokia Will Skip Dividend for First Time in 143 years, U.K Retail Sales Slow, and Spanish Youth Unemployment Tops 60% While General Unemployment Hits Record 26%. As is now characteristic of this often choppy, and sometimes volatile market, it was only a short period of time before we got some “good news” to contradict the “bad”. Friday morning the markets were treated to a European Central Bank (ECB) report indicating that many of Europe’s troubled banks will accelerate repayments of emergency loans as signs emerge that the region’s financial crisis may be abating. Only one year after making the emergency loans, 278 institutions will repay €137 billion on January 30th, the first early-repayment date for such loans. This comes as surprisingly positive news for hopes of a global economic recovery, as many market participants remain wary of the seemingly unending debt drama emanating from the region. For comparison, a recent Bloomberg survey of global economists expected early repayments of only €84 billion.
After the ECB’s good news on Friday, U.S. Treasury yields across the curve jumped significantly with several benchmark rates having their largest daily rise in more than four months. The 10-year yield jumped by over 9bp, which is on par with the biggest daily move since last September after the FOMC released its set of meeting minutes.
Meanwhile, it is encouraging that Fitch Ratings recently noted that the temporary suspension of the U.S. debt limit removes the short-term risk to the country’s current AAA credit rating. The ratings agency had previously noted that any inability to increase the debt ceiling in a timely manner would directly lead to a review of the U.S.’s sovereign rating. From the report: “In line with Fitch’s previous commentary, agreement on a credible medium-term deficit reduction plan consistent with sustaining the economic recovery would likely result in the affirmation of the U.S. ‘AAA’ rating and revision of the rating Outlook to Stable from Negative. In the absence of such a plan, the Negative Outlook would likely be resolved with a downgrade later in 2013.”
The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.
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