A week of surprises for US markets climaxed on Thursday with the unexpectedly early credit downgrade of Ford and General Motors by Standard & Poor’s, the rating agency.
The move sent carmakers’ bonds in the US and Europe plummeting and triggered modest gains in shorter-dated government bonds as investors sought safety.
But in the final twist of the week, Friday’s closely watched US employment report was surprisingly strong, indicating US employers had added 274,000 new workers in April against economists’ expectations of about 170,000.
The strong figure, accompanied by upward revisions to provisional figures for the previous two months, suggested that high costs and the recent economic softness have not dented companies’ growth plans.
For the longer term, “the strength of the employment number is by far the most important feature of the week”, said Richard Gilhooly, fixed-income strategist at BNP Paribas.
The employment news sent Treasury prices down and yields up as concerns about steeper-than-expected future Fed interest rate increases resurfaced.
In late US trade, the 2-year government bond was trading at a yield of 3.73 per cent, up 17 basis points.
The 30-year Treasury yield was 4.63 per cent, 5bp higher. And the yield gap between 2-year and 30-year Treasury yields had narrowed to 90bp from the week’s highs of above 100bp.
Earlier in the week, Tuesday’s expected 0.25 per cent hike in short-term US interest rates was followed by confusion as the Federal Open Market Committee amended the wording of its statement, which is always minutely analysed for hints of the official Fed view on growth and inflation.
The following day, the US Treasury announced the possible reintroduction of 30-year government bonds – last issued in 2001 – leading some investors to sell existing long-dated bonds in expectation of new supply next year.
The move led to some steepening of the US yield curve, which continued on Thursday with the news that S&P had cut the two giant US carmakers’ credit ratings to junk status.
The wider corporate bond market proved resilient though to the automotive sector’s woes, partly because the downgrade had been telegraphed by S&P earlier this year. “The surprise was not in the news but in the timing,” said Edward Marrinan, head of high-grade corporate credits at JPMorgan.
Even in the high-yield market, the reaction was muted. “It has been pretty well discounted,” said Christopher Garman, chief high-yield strategist at Merrill Lynch.
If all the rated debt of GM and Ford were classified as high yield, the two carmakers would constitute some 15 per cent of the high-yield debt market, by some measures.
Early on Friday, however, the broad high-yield market was trading at yields about 413bp above Treasuries, a similar level to its Wednesday close before the downgrades, said Mr Garman.
Events in the US overshadowed Wednesday’s decision by the European Central Bank, also widely expected, to keep eurozone interest rates unchanged at 2 per cent for the 23rd successive month.
Before the rate decision, yields on the 10-year Bund touched a new historic low before increasing slightly.
Get alerts on Front page when a new story is published