May 11, 2015

The Market - May 11, 2015

Government bonds have gone wild!

Sure, you might expect high-yield bonds to act unpredictably from time to time. That’s why they’re high-yield bonds. They don’t receive investment-grade ratings – BBB through AAA – from leading credit rating agencies because they’re not considered to be as creditworthy as investment grade bonds.

U.S. Treasuries are a different story. They are backed by the full faith and credit of the U.S. government which can raise taxes to cover its debts. Treasuries are considered by many to be one of the safest investments around. As a result, they’re usually pretty stable and stodgy.

That wasn’t the case last week, though. The U.S. Treasury chased after its cousin, the Bund, which is issued by the German government. The Bund has been on a tear recently. Experts cited by reported a shift in sentiment and fundamentals may have triggered European bond behavior that “helped wipe $436 billion off the global fixed-income market in the past week.”

The performance of German bonds reverberated around the world, according to, affecting U.S., French, Spanish, Japanese, Australian, Polish, and Italian government bond performance. Bond prices fell as yields rose higher. Barron’s reported:

“Seasoned observers must have been shaking their heads. Not only do high-grade government bonds not normally gyrate more than a few basis points in a day, those swings typically don’t move across oceans like tsunamis.”

Since February, U.S. Treasury yields have risen from a low of 1.67 percent without any significant change in fundamentals, according to Barron’s. It could be that U.S. markets think the Federal Reserve rate hike will occur sooner rather than later. Last week, Chairwoman Janet Yellen voiced the opinion that stock market valuations were, generally, pretty high. That could indicate the Fed is ready to act.

Be prepared for a volatile ride until the uncertainty driving markets begins to settle.

Date as of 5/8/15  1-week  Y-T-D  1-Year  3-Year  5-Year  10-Year
Standard & Poor's 500 (Domestic Stocks) 0.4% 2.8% 12.8% 15.8% 12.8% 6.0%
Dow Jones Global ex-U.S 0.2 7.9 1.3 7.9 4.9 3.7
10-year Treasury Note (Yield Only) 2.2 N/A 2.6 1.8 3.5 4.3
Gold (per ounce) 0.9 -1.1 -7.9 -9.6 -0.2 10.8
Bloomberg Commodity Index 0.7 -0.2 -23.6 -8.6 -4.4 -3.7
DJ Equity All REIT Total Return Index 0.7 -0.1 12.1 11.4 12.9 8.3


READING THE UNEMPLOYMENT TEA LEAVES. Americans have long relied on unemployment statistics to provide insights to our country’s economic health. The Richmond Federal Reserve defined full employment as “the level of employment at which virtually anyone who wants to work can find employment at the prevailing wage.” Interestingly, full employment is not zero unemployment because jobs are being created and eliminated constantly.

Many analysts have been asking what full employment is today, in part, because the Federal Reserve has said it will begin raising short-term interest rates when the economy is nearing full employment (and inflation is about two percent). It may turn out to be a trick question. The Economist wrote:

“Although the number of jobless Americans has fallen, the share of the working-age population in the labor force has also dropped considerably, from 66 percent before the financial crisis to less than 63 percent now. Temporary factors have affected the statistics, but much of the change has been driven by structural factors such as retirement of the baby-boomer generation and rising college enrollment. These developments may explain why, as the unemployment rate has fallen from 10 percent in 2009 to 5.4 percent today, the Fed’s target long-run unemployment rate has also declined, from 6 percent in 2013 to just 5.2 percent at present.”

On Friday, the Labor Department announced the unemployment rate was 5.4 percent. However, there is some skepticism about whether the American labor market really is close to full capacity. Experts cited by The Economist suggest a stronger jobs market might coax more people into the workplace. By their estimates, America’s true unemployment rate is about 6.6 percent.

The Economist suggested labor market slack is one reason average hourly earnings have remained sluggish. Many thought low oil prices would push consumer spending higher. They did not. It looks like bad weather and stagnant wages may be behind lethargic economic growth.

Weekly Focus – Think About It

“Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do.”
--Steve Jobs, Co-founder, CEO, and Chairman of Apple Inc.

Best regards,

Angela M Bender

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  • * Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
  • *Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
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  • * The Dow Jones Global ex-U.S. Index covers approximately 95 percent of the market capitalization of the 45 developed and emerging countries included in the Index.
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  • * Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
  • * The Bloomberg 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 Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
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