Financial markets in the United States of America stayed highly volatile during October and November. However, the yields on the short and long ends of the curve have remained relatively unchanged. Further, the 10-year government bond yield reached a level below 3.5%, while the 2-year note yield continued to hover around the 1% level. So far as it related to other asset classes, including investment-grade bonds, high-yield bonds, commodities, equities, etc, the price stabilized, and in certain cases, it registered slight gains, especially for riskier ones.
The inbox indices and box ABS index rose to (indicate percentage) compared to inbox (indicate rates) which posted returns of (indicate rates) in the past two months. The perceived stabilization in the US financial markets allowed financial institutions to allocate excess liquidity into more risky and long-term assets.
The economy continued to recover and progress in the following months which resulted in positive returns, and the minutes of the Monetary Policy Meetings of FOMC for September and October confirmed this aspect. This conclusion also had a fundamental basis in expanding manufacturing spending to re-stock inventory after months of liquidation, US PMI (by JP Morgan and Markit) for Oct had risen to 55.7, indicating that the economy growing at a faster rate.
However, there also exist some concerns regarding the sustainability of the recovery like the uncertain path of consumer demand, which becomes detrimental to an economy that is traditionally consumption-driven. But this has partly been eased by newly released unemployment data which indicates that the initial and continuing claims of jobless people are showing a trend of decline. On the other hand, the unemployment rate has touched a never-before high at 10.2, and payroll job opportunities reduced to a lower rate than anticipated.
In yet another development, the market received a boost by the zero interest rate and further expectation of economic recovery in the future. This was also fuelled by concern about inflation, especially commodities-driven inflation rather than core inflation rate as well as possible interest hike. In addition, the treasury’s efforts to extend the average maturity of US debt from 53 months to 74 -90 months helped the market to gain confidence and it triggered a perception that the Treasury’s attempts to lock in current low-interest rates will continue for two to three more years. Thus, it can be expected that interests are going to climb in the next year or so.
Another risk involved here is the possible difference between valuations and the actual economic fundamentals that may occur in the future.
Fed’s claim to extend the exceptionally low-interest rates forced the market to put more liquidity into the momentum trade for risk assets. However, it remains uncertain whether the short-term rally will sustain or rather, will result in the market getting more volatile.