The Markets
If it looks like a bond, and it acts like a bond...oh...that's the problem. Government bonds aren't acting the way investors expect.
Last week, 10-year U.S. Treasuries - which, typically, are thought to be safe and stable investments - suffered the biggest one-week sell off since June 2013, according to The Wall Street Journal. Treasuries finished the week yielding 2.4 percent, a gain of 0.3 percent. In the world of stodgy, backed-by-the-full-faith-and-credit-of-the-U.S.-government-bonds, that's a big change.
The performance of U.S. bonds paired with that of German government bonds. BloombergBusiness reported 10-year Bunds delivered their worst weekly performance since 1998. On Friday, the German benchmark bond settled at 0.8 percent after rising to almost 1 percent on Thursday. In late April, the yield on Bunds was at an all-time low of 0.049 percent.
So, what's going on? Why are bond values fluctuating so much? Barron's said the problem is a lack of liquidity in fixed-income markets:
"The global financial system is awash in liquidity, created by central banks as they have driven short-term interest rates to zero (or even below) and expanded their balance sheets by the equivalent of trillions of dollars. And so the world is swimming in cheap money. At the same time, liquidity is said to be at a low ebb in the financial markets, especially for bonds... As a result, transactions that once didn't cause prices to budge now send them lurching from trade to trade... And the advice from central bankers on both sides of the Atlantic about this new volatility? Get used to it."
One reason for the lack of liquidity is the relative scarcity of market makers, reported Barron's. In the past, banks made markets - buying and selling for their own accounts - which created liquidity, but new regulations have curtailed those activities.
Looking beyond bond market illiquidity, there was economic good news in the United States: employment numbers improved. However, investors worried that could push the Federal Reserve toward a rate increase sooner rather than later, and U.S. stock markets finished flat to lower for the week.
Data as of 6/5/15
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
Standard & Poor's 500 (Domestic Stocks)
|
-0.7%
|
1.7%
|
7.9%
|
17.6%
|
14.8%
|
5.7%
|
Dow Jones Global ex-U.S.
|
-1.7
|
4.5
|
-4.5
|
10.4
|
6.3
|
3.4
|
10-year Treasury Note (Yield Only)
|
2.4
|
NA
|
2.6
|
1.6
|
3.2
|
4.0
|
Gold (per ounce)
|
-2.3
|
-2.9
|
-7.0
|
-10.7
|
-0.8
|
10.5
|
Bloomberg Commodity Index
|
-0.7
|
-3.9
|
-24.8
|
-7.7
|
-3.9
|
-4.3
|
DJ Equity All REIT Total Return Index
|
-2.1
|
-3.8
|
5.0
|
12.2
|
14.9
|
7.5
|
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron's, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
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