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ECONOMIC AND BOND MARKET RECAP

By Rom Badilla, CFA – Bondsquawk.com

As stocks tumbled around the globe fueled by economic indicators suggesting slowing growth, U.S. Treasuries rallied in a flight-to-quality trade.

The global sell-off began when the Conference Board stated that the leading economic index increased only 0.3 percent in April which was significantly less than the initial report of 1.7 percent from earlier this month. This sent shares in China’s Shanghai Composite Index down 4.3 percent to a new recent low of 2427.05. The drop abroad sent negative ripples stateside which was fueled even further by economic data releases suggest a slowdown in U.S. economic activity.

The Conference Board piled onto the bad news by releasing a disappointing Consumer Confidence Index. The Index came in at a reading of 52.9 versus economist expectations of 62.5, and after a revised prior period reading of 62.7. The disappointing release signals that people are less optimistic of the economy due to little improvement in the labor market.

As a result, U.S. Treasuries rallied across the curve led by the long-end of the curve. The yield on both the 10-Year Treasury and Long Bond declined 7 basis points to close the day at 2.95 and 3.93 percent, respectively. Today’s close on the 10-Year now stands at a one year low. The 5-Year closed at 1.77 percent, a drop of 5 basis points. The yield on the 2-Year tightened 3 basis points to 0.59 percent.

10-Year U.S. Treasury Yield – Historical Chart

Inflation expectations as indicated by the yield differential between 10-Year Treasuries and 10-Year Treasury Inflation Protected Securities (TIPS) declined 2 basis points to 1.89 percent. This breakeven rate has now dropped 56 basis points since the end of April.

Inflation Expectations – Historical Chart

Across the Atlantic, government bond yields were mixed. German 5-Year Bunds decreased 3 basis points to a yield of 1.44 percent while France’s 5-Year declined 7 basis points to 1.98 percent. The yield on U.K. 5-Year Gilts increased 3 basis points to 2.11 percent.

Peripheral bond yields mixed as well. Greece 5-Year bond yields decreased 7 basis points to 10.91 percent. Spain’s 5-Year increased 9 basis points to 3.79 percent while the yield on Portugal’s added 2 basis points to end at 4.69 percent. Italy’s 5-Year closed at 3.00 percent, unchanged from yesterday.

The U.S. credit markets also felt the heat of today’s action as spreads widened. The BofA Merrill Lynch High Yield Index widened 13 basis points to a spread of 706 basis points over comparable maturity Treasuries. The Investment Grade index widened a basis point to a spread of 209. The U.S. Bank Index increased 3 basis points to a spread of 277.

Merrill Lynch U.S. High Yield Master Index Spread – YTD Chart

As mentioned above, stocks tanked today. The S&P 500 declined 3.1 percent to 1041.24 while the Nasdaq dropped 3.9 percent to 2135.18. The CBOE VIX spiked 17 percent to 34.13.

The Dollar Index advanced 0.6 percent to 86.132. The Euro dropped 0.7 percent to 1.2188 while the British Pound declined 0.3 percent to 1.5067.