SINCE WE LAST MET
Like many of you, we were watching the events of the past few weeks far away from our desks, and, therefore, did not have the insight that our colleagues, associates and Bloomberg terminals provide in delving into the deeper meaning of the market’s moves. On the surface, the geopolitical headlines certainly appeared dire enough to drive treasury yields to their YTD lows, while a 10-year bund that starts to look like a JGB also produces an ominous outlook. At the same time, the outlook for the domestic economy has not changed much, with the strength in 2Q:14 GDP looking like it is carrying into 2H:14 results. As the chart below indicates, the continued strength of economic data has pushed the economic surprise index deeply into positive territory for the first time since the start of the year. Undoubtedly, the continued upbeat employment picture is contributing to these gains, with the ongoing caveats over the depth and quality of the jobs recovery. In a nutshell, we are where we have been for the better part of the summer, with external influences holding greater sway over the improving domestic data as rates continue to trend lower and remain in the lower channel of recent ranges. From that perspective, most G-7 yields have changed little since we last talked, with 10-year UST yields two bps higher since our last report, although we did have a 10 bps swing over the past three weeks. Eurozone centric issues have pushed Bunds and Oats into a lower yield range, while periphery debt posted some of the strongest returns during this period. In fact, risk assets have generally outperformed despite the perceived geopolitical risk that drove treasury yields temporarily to their YTD lows. The most discernable trends that drove us through the end of the summer have been stronger equity markets, a stronger dollar (vs. weakening euro and yen, in particular) and a general flattening of the UST curve. The returns data illustrates these moves, with developed equity markets gaining between 3% and 5%, while riskier fixed income asset classes generally posted excess returns for August. Even high yield, which had been in the midst of a bear market at the start of August, posted a 1.6% gain for the month, with the average yield recovering all of its widening move and retracing 70 bps back to mid-July levels of 5.2%. Investment grade credit posted a 1.4% total return for August, avoiding the levels of volatility that high yield experienced, essentially finishing unchanged during the month from a spread perspective at +108 bps.