Author: Marquette Test

10-Year Government Bond Yields in PIIGS

This week’s Chart of the Week deals with the sovereign debt crisis in Europe.

This week’s Chart of the Week deals with the sovereign debt crisis in Europe. Over the past several weeks the fiscal situation in Portugal has received a significant amount of attention, and there has been speculation that Portugal will be the next country to require a bailout package from the EU. Yields on Portuguese government bonds have been steadily rising throughout the course of the past year, and in recent weeks the yield on the Portuguese 10-year bond has been trending towards 7%. The 7% threshold is significant because both Greece and Ireland were forced to request a bailout package from the EU shortly after yields on their 10-year bonds exceeded 7% (based on a rolling 10-day average). The yield on Greek 10-year bond broke through the 7% threshold on April 16, 2010, and Greece requested a bailout package on April 23, 2010. The yield on the Irish 10-year bond broke through the 7% threshold on November 15, 2010, and Ireland requested a bailout package on November 21, 2010. Portugal had a successful bond auction on January 12, 2011, and yields on their 10-year bond have backed away from the 7% threshold. However, Portugal is still facing major fiscal issues over the near term. They have a significant budget deficit (9.3% of GDP as of 12/31/09), a high debt to GDP ratio (80% as of 9/30/10), a high unemployment rate (11% as of 11/30/10), and a low growth rate (1.4% as of 9/30/10). In addition, Portugal has over €20 billion (approximately $26 billion) in funding needs in 2011, and unless the market perceives a material improvement in Portugal’s fiscal situation, it will be difficult for the yield on their 10-year bonds to stay below the 7% threshold.

Nonfarm Payroll Employment Revisions

“Jobs” and “unemployment” have garnered a lot of attention during this economic recovery, mostly because the headline numbers have been disappointing.

“Jobs” and “unemployment” have garnered a lot of attention during this economic recovery, mostly because the headline numbers have been disappointing. However, it is important to realize that while the headline number, which is reported the first Friday of every month, gets most of the media attention, it is subsequently revised twice and it is the final number that gives the more accurate picture of job creation in the US economy. This is important for two reasons. First, as this chart shows through 2010 net revisions have been consistently positive (with June the only month showing a negative revision). Over the course of year net revisions have shown that 409,000 more net jobs were created than the headline numbers would lead one to believe. Second, the direction of revisions is indicative of the overall health of the job market and economy. As this chart shows, net revisions were strongly negative during the depth of the financial crisis in the fourth quarter of 2008 but as the economy began to improve net revisions turned positive. Given these trends it is likely that both the November and December job numbers will be revised higher in the coming months and revisions are like to remain positive in 2011.

Corporate Bond Market Picks Up

This week’s chart(s) of the week show the exposure that German, French, and UK Banks have to the debt of Portugal, Ireland, Greece, and Spain (PIGS).

This week’s chart(s) of the week show the exposure that German, French, and UK Banks have to the debt of Portugal, Ireland, Greece, and Spain (PIGS). The top chart shows the Total Exposure that the German, French, and UK Banks have to debt of the PIGS countries. This includes Government debt, Private debt (both household and Corporate), and the value of any derivative contracts held by the banks of the respective countries. The middle chart shows the exposure that the German, French, and UK Banks have to the Government Debt of the PIGS countries. The bottom chart shows the exposure that the German, French, and UK Banks have to the Government & Bank Debt of the PIGS countries.

These charts help to explain why Germany, France, and the UK (the 3 biggest Euro area economies) were so eager to help bail out the governments of Greece and Ireland (thus far). Had the EU not stepped in to help Greece and Ireland, they likely would have defaulted on their debt, which would likely have required the German, French, and UK governments to bailout their banks (the “stress tests” that the European banks recently went through did not include the possibility of a sovereign default).

3Q 2010 Investment Perspectives: Details of QE2 Released

In a move widely expected by investors and analysts, yesterday the Fed announced details of further quantitative easing (“QE”), commonly referred to as QE2. Similar to the first round of quantitative easing initiated between January 2009 and March 2010, QE2 will feature the Fed expanding its holdings of Treasury securities in an effort to promote growth, maintain low interest rates, and reduce unemployment.

Download PDF

2Q 2010 Investment Perspectives

Financial Reform Bill Signed into Law
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama on July 21, 2010. Broadly considered to be the most notable overhaul of financial regulation since the 1930s, the bill targets a wide variety of topics related to financial reform. The following article highlights the major points of the legislation.

Potential Impact of Pending Legislation on Stable Value Investments
With nearly 700 billion dollars in assets, stable value funds are an important part of many retirement plans. Stable value funds have proven popular as a conservative investment option for investors striving to maintain principal while earning a higher return than cash.

Due to pending financial regulation legislation, stable value funds could potentially face a different regulatory environment going forward. As stable value is an important asset class for many retirement investors, Marquette Associates has been actively monitoring the possible effects of new financial regulation on the stable value market. This article will first explain how stable value funds work, and then discuss why they could be affected by new regulation, and what those potential effects may be.

Download PDF

1Q 2010 Investment Perspectives

Proposed Financial Reform
Note: this article was written in early April, before various changes to the proposed legislation were made.
As we stand in the aftermath of the most severe economic downturn since the Great Depression, we must reflect upon several of the causes that led us to this point.  The primary causes of the downturn were a result of poor risk management, oversight, and regulation. In response to these factors, lawmakers have proposed a bill that attempts to address several of the shortcomings in our current regulatory/financial system. The bill authored by Chris Dodd and the Senate Committee on Banking, Housing, and Urban Affairs intends to address the following primary issues:

  • Protect/educate consumers
  • Identify systemic risks
  • Eliminate loopholes
  • Streamline bank supervision
  • Input on executive compensation
  • Transparency and accountability for credit rating agencies and financial products
  • Strengthen oversight to prevent fraud and manipulation

Today’s Environment: An Unusually Steep Yield Curve
Today’s interest rate environment is unique in American post-war economic history. With the federal funds rate at the zero lower bound and likely to stay low for an “extended period,” the yield curve is as steep as it has ever been since the 1950’s.

Download PDF

2010 Market Preview

Though the scars of the 2008 financial crisis remain, 2009 helped to alleviate some of the pain as financial markets rallied and tidbits of positive economic news emerged. Most major stock indices posted positive returns in 2009, and the bond market held steady (with the exception of U.S. Treasuries coming back to earth), with sectors such as high yield and senior secured loans recording record returns. Alternative asset classes had more of a mixed 2009: hedge funds reversed their 2008 struggles, while debt access and legacy assets continued to haunt the real estate and private equity markets. On the economic front, GDP turned positive in the third quarter, perhaps signaling that the recession was over and brighter days lie ahead. Despite these facts, many questions still remain. Has the stock market rally outpaced the economic recovery? What should we expect from alternative asset classes? Is inflation a threat to the economy? When will banks resume normal lending practices? Will the unemployment rate improve?

In the following articles, we will take a closer look at each asset class, examining the major news items from 2009, as well as critical issues for 2010. Each article contains insightful analysis and key themes to monitor over the coming year, themes which will underlie the actual performance of the asset classes covered. Articles are offered for the following asset classes: fixed income, domestic equities, international equities, hedge funds, real estate, infrastructure, and private equity. As a launching point, we take a broad view of the economy and examine some crucial macroeconomic topics as they pertain to the U.S. economy.

Download PDF

3Q 2009 Investment Perspectives

Update on Government Stimulus Programs
With the United States’ economy plunging into the most severe downturn since the Great Depression, policymakers have been faced with the unenviable task of reviving an $11 trillion economy saddled with debt and struggling to maintain its lead in the global marketplace. As mounting losses at the nation’s “too big to fail” financial institutions were agitating the global markets, the government was being urged to intervene in order to avoid a systemic collapse. After the traditional tools used to rouse the economy during cyclical downturns provided little relief, it quickly became clear that this unprecedented crisis would require an unprecedented response.  Displaying little faith in free market capitalism’s “invisible hand,” the nation’s financial leaders responded with pointed economic stimulus designed to match the crisis in both size and scope. In response to the crisis, Congress, together with the Department of the Treasury, the Federal Reserve, and numerous other government agencies apportioned over $2 trillion in bank bailouts, tax cuts, and spending programs. This represented the largest amount of government spending America had ever seen. Considered strong and swift by some, and reckless by others, the stimulus was designed for widespread relief and met with an even wider range of public opinion. Now, with the worst of the crisis having passed and a less than certain future ahead, a review of some of the marquee financial programs of the largest government stimulus effort in the country’s history is in order.

Credit Markets Update
The economic crisis that we are currently in the midst of has commonly been referred to as a credit crisis or credit crunch. This is largely due to the fact that much of the rapid deterioration in economic conditions over the past two years was either directly caused by or greatly exacerbated by problems in the credit markets. This crisis, which began as a problem with subprime mortgages in early 2007, gradually spread throughout the credit markets, and eventually brought the global economy to its knees. The consensus among policymakers and economists alike is that the global economy will not be able to recover without a properly functioning credit market, and toward that end, the U.S. government has spent a significant amount of resources toward repairing the damaged credit markets of 2008.

Download PDF

1Q 2009 Investment Perspectives

Understanding Sovereign Wealth Funds
Sovereign Wealth Funds (SWF) were first introduced as an investment vehicle more than seventy years ago, but their popularity has greatly increased over the past two decades. Although SWF have received criticism regarding their political involvement and influence over sector growth, economists believe more countries will start to introduce and further expand their involvement in SWF. Since SWF are becoming larger players in global financial markets, it is important to understand the motivation, structure and main players in the SWF arena.

Stimulus Bill Signed into Law, Mortgage Relief Plan Unveiled
Two major programs designed to halt the negative momentum of the financial crisis were recently announced: the stimulus bill and the Homeowner Affordability and Stability Plan. If successful, both of these initiatives could help reverse the direction of the current economy and restore positive growth. In the following, we summarize the highlights of each announcement.

Download PDF

2Q 2009 Investment Perspectives

SEC and DOL Discuss Target Date Funds
Over the course of the past several years target-date funds (TDFs) have grown in popularity amongst participant-directed retirement plans. TDFs offer investors the benefit of asset class diversification while rebalancing the asset allocation automatically as the investor progresses along the glide path. As the investor approaches retirement age, the portfolio’s equity exposure is methodically reduced over time according to the glide path, and replaced with more conservative, less volatile asset classes such as bonds, inflation-protected securities, and cash. The glide path dictates at what ages, and to what extent, the asset allocation is modified, in effect transferring the responsibility of portfolio management from the investor to a professional money manager.

Are Equities Poised for a Rebound?
Whenever we are asked for guidance on the stock market, we find it useful to look at long-term data to reveal trends and conclusions. In the following, we examine historical and current market data, along with macroeconomic figures. Collectively, our analysis provides evidence that current equity market conditions may have reached their bottom, and a recovery could be sooner than many expect.

Download PDF