With the sudden rush of news hitting the markets, I thought it would be good to provide a quick market update, hitting on the most important points and how they affect key assets like stocks and bonds.
For almost seven years now Central Banks have been pursuing a course of lowering interest rates and devaluing their currencies in an effort to spur growth. In my opinion, it hasn’t worked. And at best, it’s provided a muted economic recovery. But along the way there were some unintended consequences.
For instance, does it sound suspicious to you that Italian government bonds would have a yield lower than that of US Treasuries? It does to me, yet that is the way that many of the European periphery bonds have been trading. Yields typically go up based on the risk of the underlying lender not paying back what was borrowed. Does anyone really think that there is more risk in US Treasuries than in the bonds of Italy?
Now, what about Greece?
Well, the markets may have started to wake up to reality over the weekend as the Greek government basically admitted that they wouldn’t agree to reforms. Then the Greek government admitted today that it won’t be able to pay back the IMF load that was due today.
Does anyone remember Cyprus? The same scenario seems to be happening in Greece although we haven’t seen any riots yet. We may see them soon because the Greek government is now only allowing people to withdraw $60 Euros a day to live on.
This sent a shock through the markets—especially the formerly mispriced bonds of countries like Italy, Spain, etc. and we even saw German bund yields drop almost 15% overnight into Monday’s session.
As a result of all of this, the U.S. stock market was down big yesterday, with the S&P 500 falling 2.1%. Note, the S&P 500 is now basically even FOR THE YEAR.
Even though I have some equity exposure in accounts, generally, I have more bond exposure so we should see the accounts fair well if stocks heads lower.
The conundrum now is whether to sell off any portions of the iShares 20+ Year Treasury Bond ETF (TLT) or Vanguard Extended Duration Treasury ETF (EDV) to reduce bond market risk? If we continue to see the markets correct (which is possible) and/or see continued confusion in Europe and China, then holding the bonds could be very beneficial to the accounts. The downside is that if there is a Greek ‘solution’ then stocks can go back up and bonds back down. Currently my accounts are more bond heavy and that has hurt the last few months. But if the forecast in Europe is for storms and the US economy continues to only muddle along, then the current positions should result in a nice recovery.
These are not typical markets and I haven’t as yet determined the best course of action. I will continue to monitor the markets around the world closely throughout the week. Thanks for reading.
Twitter: @JeffVoudrie
The author holds positions in mentioned securities such as TLT and EDV at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
