Happy New Year!
Good-bye 2010, hello 2011.
Well, we experienced another of our typical holiday-shortened, year-ending weeks. There wasn’t a lot of news or activity going on, so what there was had an amplified effect.
Over the past weekend, we were treated to the news that China had raised their interest rates for a second time since October. The Chinese are trying to apply the brakes to their very robust economy.
In the past when we have witnessed the Chinese economy potentially slowing down, the commodity and equity markets have stumbled. This didn’t happen this time. Maybe because the idea of China tightening interest rates had been well telegraphed to the markets or maybe because, in general, the aggregate world economy is the strongest it’s been in 3 years. We will have to wait-and-see as we progress into 2011.
With many participants on holiday, trading in fixed-income was relatively light. There were no significant corporate bond deals this week. As the market returns next week, we might see a bit of activity on the corporate desks.
US Treasuries saw quite a bit of volatility this week. After weak 2-year and 5-year auctions, the markets sold off quite a bit. Part of the reason for the dramatic price/yield movement was that world-wide, many investors were simply not in the office. Back in ancient times (pre-financial crisis), before we saw such a significant increase in the number of auctions the Treasury held, the Treasury simply wouldn’t have held auctions during the holiday week.
By close of business on Tuesday, the 5-year Treasury had backed up 13bps and the 10-year security had backed up 16bps. Then all was made better by a well received 7-year auction on Wednesday.
For the week, yields were down along the entire maturity curve. The 2-year US Treasury yield was down 6bps to 59bps; the 5-year was down 5bps to 2.01%; the 10-year was down 10bps to 3.29%; and the 30-year was down 14bps to 4.33%. It is interesting to note that both the 10-year and the 2-year dropped 54bps from the beginning of 2010 to the end.
The big economic news of the week was the Weekly Unemployment Claims number. For the first time since July 2008, the weekly number dipped under 400k. The actual number was 388k. If the recent trend of lower unemployment claims continues, we may actually start to see the unemployment rate drop here in America. On Friday, we will get the last Employment report for 2010. The consensus is for an increase of 140k jobs and for the unemployment rate to drop -0.1% to 9.7%.
In money-market land, commercial paper (CP) continues its shrinking ways. For the week ending December 29th, the CP market contracted by another -$4.7 billion to a total of $969 billion outstanding. This is the lowest level since 1997.
Best of luck to everyone in the New Year.