Did you feel the tremor in the financial markets the other day? Probably not, but maybe you noticed the small tsunami that washed ashore in US Treasuries.
After hitting a peak of 3.1% yield on 17 May the 10-year Treasury fell below 2.8%. While this remains within the 10-year Treasuries rising yield channel, it was a noticeable flight-to-safety (with some short covering on top).
A financial earthquake in Italy was accompanied by a small flight-to-safety tsunami. The tsunami not only washed onto the financial shores in Germany but also America.
What caused the tremor? The news will tell you it has to do with fear of the current political crisis turning into a financial crisis. What they fail to ask is why the Italian 10-year bonds were ever below 2% in the first place. Italy is a no growth country, heavily in debt with zombie banks hanging on life support and Italy does not have its own currency to bail themselves out.
The markets had it correct in 2011, but the European Central Bank was not in the mood to let the free markets sort it out. Risk never really left, it was held down by the central bank like holding a beach ball underwater in the pool. And we all know what happens if you let go of the ball.
The ECB lost control of the ball
The SP500 Richter scale only registered a 1.2% loss but then again the US is a safe haven market. It has already recovered that loss. The European SP500 equivalent (STOXX 600) fell 3.1% yesterday and has not bounced back yet. Safe haven or not, stocks are a risk asset and they took a small RISK-OFF hit.
What tremor?
We expect more tremors over the coming year emanating out of Europe and emerging markets. As a safe haven, the US markets might hold up longer than the rest. But I would not bet the house on it.
To understand why members can now view our Spring Summary Report
Categories: Perspectives, TSP Charts