bondsIf 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, Gold, DJ-UBS 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 TR 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.

*The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.  You cannot invest directly in this index.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

* “Is it a GDP Optical Illusion?”

Sources:

http://www.wsj.com/articles/u-s-government-bonds-sell-off-after-healthy-jobs-report-1433508534

http://www.bloomberg.com/news/articles/2015-06-05/german-bond-slump-caps-week-that-surpasses-worst-of-euro-crisis

http://www.marketwatch.com/story/it-has-been-a-rough-ride-for-global-benchmark-bonds-2015-06-05

http://online.barrons.com/articles/a-liquidity-time-bomb-in-the-bond-market-1433555105?mod=BOL_hp_we_columns

http://online.barrons.com/mdc/public/page/9_3063-economicCalendar.html?mod=BOL_Nav_MAR_hpp (Click on U.S. & Intl Recaps, “A walk on the wide side,” then scroll down to Global Stock Market Recap chart)

 

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