Knowledge Center Archive
Podcast: May 2012 Macro Summary View
What a difference one month makes. May 2012 will be remembered for the magnitude of the risk-off mentality seen during the month. The strength seen in the first quarter did not carry through, except for within the Treasury market. Equities reversed course. Commodities also had a difficult month. Gold trended lower and oil sold off sharply as the notion of a global slowdown started to wear on investors. The Fed was absent from a formal meeting in May. Recent setbacks within the global economy inspired increased chatter from investors regarding the potential for additional quantitative easing in different forms.
Hello, my name is Sean Simko. I am head of SEI Fixed Income Portfolio Management. Today’s discussion is a recap of the market activity and performance for the month of May.
What a difference one month makes. May 2012 will be remembered for the magnitude of the risk-off mentality seen during the month. The strength seen in the first quarter did not carry through, except for within the Treasury market. Unfortunately, that move was driven by fear. Equities reversed course, with the S&P 500 Index1 falling 6.8% and erasing approximately 60.0% of its year-to-date gains. Commodities also had a difficult month. Gold trended lower, falling over 6.0% for the month and ending at $1,560 per ounce. Oil sold off sharply as the notion of a global slowdown started to wear on investors. After hitting a high on May 1 of $106.50 per barrel, oil fell over 18.0% to end the month at $86.53. Agriculture, as measured by the Dow Jones-UBS Agriculture Total Return Index, fell 9.5%2.
The Fed was absent from a formal meeting in May. Recent setbacks within the global economy inspired increased chatter from investors regarding the potential for additional quantitative easing in different forms. Sterilized quantitative easing, “Operation Twist,” or back-to-basics outright purchases all entered the discussion. The current incarnation of “Operation Twist” is set to conclude at the end of June. It is no secret that inflation has slowed, creating a focus on the threat of deflation or disinflation. The next scheduled Federal Open Market Committee meeting is set for June 19 and 20. We expect Federal Reserve Chairman Ben Bernanke to acknowledge in greater detail the threats to the U.S. and global economies, with a slant toward the possibility of additional accommodation.
Treasurys were back in the limelight, with yields pushing lower as the flight-to-quality trade commenced. The move was driven by the risk-off mentality—increased speculation about Greece leaving the eurozone and the possible contagion effect upon Spain and Portugal was the primary driver. As a result, the two-year/10-year spread flattened 38 basis points to 129 basis points. For the month, the long end of the curve outperformed, with the 30-year yield falling 50 basis points to 2.46% and the 10-year yield moving lower by 38 basis points to 1.55%. We feel that yields will remain range-bound at these ultra low levels as the economic landscape within the U.S. slows. This is one of those times in which you are happy if you are long, but may not want to add new exposure at these levels.2
The municipal sector, as represented by the Barclays Capital Municipal Bond Index3, returned 0.83%. Strong demand fuelled the move, as fund inflows remained heavy and pushed up prices. Yields at the 10-year point of the AAA general obligation curve fell modestly, as municipal securities rallied along with Treasurys. The yield at the 10-year point of the curve fell 3 basis points, while the 30-year point fell by 12 basis points. High-grade municipals as a percentage of Treasurys cheapened from the recent price movement. The 10-year AAA general-obligation debt percentage to Treasurys started the month around 97.0%. At month end, this ratio was at 121.0%, again remaining well above historical averages. We expect these levels to hold amid headlines regarding austerity measures and the recent move within the Treasury market4.
Spreads products felt a lot of pain in May. Investment-grade corporate spreads fell throughout the month across the entire credit curve. Aggregate investment-grade option-adjusted spreads, as measured by the Barclays Capital Credit Index5, widened 23 basis points for the month. On a sector basis, Industrials were approximately 25 basis points wider; Telecom and Financials followed a similar path, with spreads widening 29 and 38 basis points, respectively. The appetite for risk was almost non-existent for the month. Even so, the new-issue calendar remains healthy, with approximately $79 billion of new issuance for the month. This brought the year-to-date total to $367 billion.4
The economic situation shifted course and turned bleaker in May. We would point out, however, that the sustainability of recent moves has always been in question. The labor market is showing signs of faltering, with job growth slowing and companies appearing hesitant to hire in the wake of global headwinds and uncertainty regarding the November elections. At this point, we maintain the view that the economy—while threatened by a stalling labor market—is still growing, although at a more tepid pace than anticipated.
After recently adding to our Treasury exposure in the recent backup, our base case is to hold firm in our exposure to the sector. We remain positive toward investment-grade corporate debt and neutral on agency spreads. In the end, we expect volatility to remain present as investors continue to dissect the risks and potential outcomes of the European debt crisis and what, if anything, global leaders (including the U.S.) will do if conditions deteriorate enough to warrant activity.
If you have any questions regarding this commentary or the market, please contact your SEI representative.
1 The S&P 500 Index is a capitalization-weighted index made up of 500 widely held large-cap U.S. stocks in the Industrials, Transportation, Utilities and Financials sectors.
2 Source: Bloomberg
3 The Barclays Capital Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least one year.
4 Source: Barclays
5 The Barclays Capital Credit Index is an unmanaged index composed of U.S. investment-grade corporate bonds.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. This information is for educational purposes only.
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