This was another week where uncertainty was the name of the game.
We continued to receive unsettling news from the Aegean. The tug-of-war between Greece and the EC is ongoing. We learned that the credit rating agencies were considering further downgrades to Greece. Credit spreads widened and the CDS market continues to price in a higher likelihood of a default event. The European economies with similar debt and growth characteristics (affectionately referred to as the PIGS) saw their credit profiles also deteriorate. Questions about the survivability of the Euro continue to be raised.
In the US, the release of several weak economic numbers added to the feeling that the economic recovery is tepid as best. When the news from Europe and Chairman Bernanke’s comments were added into the mix, the result was that the Treasury market rallied for the first time in three weeks. Investors continue to seek the safety of the US government market and the greenback.
The market now believes the Fed is less inclined to raise the Fed Funds rate prior to the beginning of 2011. The futures market is now pricing in the probability of a tightening of interest rates at 50/50 by November.
All of this uncertainty has had a significant impact on the debt markets. We just concluded the quietest February for debt issuance since 2002. Even with corporate bond yields at their lowest levels since September 2005, we continue to witness debt and equity deals being cancelled and postponed due to market volatility.
One potential sign of an improving situation has been the recent growth in the commercial paper market. The CP market has now grown for the past three weeks. Since January 6th, the CP market has grown by 7.3% or $78.1 billion.
The market’s eyes will be focused on the upcoming employment reports. Unfortunately, with the severe weather we have been experiencing, there is a high likelihood that any report will be tainted with weather related revisions in the future.
We will all have to remain vigilant as events around the world continued to develop.