European Union attempts to contain the debt crisis continue to roil global markets. Volatility has remained constant as EU summits, leadership changes, possible referendum votes and bankruptcies, amongst other things, have provided an endless stream of price moving headlines. Over the past month, the flight to quality bid regained some momentum as the optimism around a fix-all plan crafted during the numerous EU summits gave way to referendum votes and leadership changes. As a result, the yield on the 10yr has recently tested the psychological 2.0% threshold once again. It’s apparent that investors remain tentative as treasury yields have settled into a range that is roughly at the midway point between the recent highs and lows (~ 10yr 1.71% to 2.39%).
With both Greece and Italy in the midst of leadership changes, investors remain fearful that the crisis will spread to other nations as well as the banking system. Contagion fears are being realized as yields on Italy’s debt have continued to climb and access to debt markets is on thin ice. Not surprisingly, anxiety around the need for a TARP like facility for EU banks increased after the unexpected demise of MF Global. The securities firm was pummeled after disclosing enormous exposure to European sovereign debt. The end was swift as investors headed for the exits and MF Global was forced to file for bankruptcy.
Despite the EU debt crisis providing an ominous milieu, the US consumer has shown some resiliency. US economic data has actually modestly improved recently with increases in a consumer spending and better than expected data on US employment. However, most agree that the present levels of improvement will need to be stepped up for the US economy to emerge from this lingering funk. Political rhetoric around job creation and US housing initiatives continue to swirl and will likely increase as we edge closed to an election year. However, a political battle looms as Congress will inevitably be forced to revisit the budget deficit as the self imposed congressional super-committee deadline is nearing.