Bonds beat stocks and commodities in August after Standard & Poor’s decision to strip the U.S. government of its AAA credit rating roiled global markets and made Treasurys the world’s best-performing assets.
The combination of the downgrade to AA-plus, slowing U.S. growth and Europe’s debt crisis drove investors into the world’s biggest and most-liquid debt market. Treasurys returned 2.8 percent, while the global bond market gained 1.99 percent, according to Bank of America Merrill Lynch index data. The MSCI All-Country World Index of stocks fell 7 percent, the biggest slump since May 2010, and the Standard & Poor’s GSCI Total Return Index of commodities lost 1.8 percent.
Instead of eroding the value of U.S. government debt, the rating cut sparked financial market turmoil that made Treasurys and the world’s reserve currency favorites among investors, with 10-year note yields dropping to a record low 1.97 percent on Aug. 18. The Chicago Board Options Exchange Volatility Index, or VIX, surged the most after the downgrade on Aug. 8 since February 2007. Crude oil fell 6.4 percent on the rating cut.
“You’ve generally seen sentiment really weakening and it all dovetailed together,” said Brian Schneider, senior portfolio manager and head of U.S. rates for Invesco Fixed- Income at Invesco Ltd., which oversees $653 billion. “With Treasurys and the dollar being the global reserve currency and the biggest, broadest financial market out there, Treasurys have benefited.”
The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trade partners, rose 0.3 percent to 74.147 in August, ending a two-month slide. It rose 0.5 percent at 7:33 a.m. in New York.
Stocks and commodities pared losses at the end of the month after Federal Reserve Chairman Ben S. Bernanke indicated during an Aug. 26 speech in Jackson Hole, Wyoming, that the economy isn’t deteriorating enough to warrant any immediate stimulus.
While Commerce Department figures showed gross domestic product climbed at a less-than-previously estimated 1 percent annual rate from April through June, the economy has never contracted with the difference between 10-year and 30-year Treasury yields as wide as the current 1.38 percentage points, or 138 basis points.
Sovereign debt excluding Treasurys returned 1.65 percent, according to Bank of America Merrill Lynch index data. Company debt worldwide lost 0.38 percent, the worst return since June.
S&P cited the weakening “effectiveness, stability and predictability of American policymaking and political institutions” in its Aug. 5 downgrade of the U.S. The firm cut the nation by one step even after Treasury Department officials told the firm it had overestimated future national debt by $2 trillion. S&P said the error didn’t affect its decision.
“The downgrade was noise,” said Matt Toms, the head of U.S public fixed-income investments at Atlanta-based ING Investment Management, which oversees more than $500 billion. “Raising the debt ceiling was more than noise and was something that helped degrade the consumer and business outlook.”
Moody’s Investors Service and Fitch Ratings affirmed their AAA rankings on Aug. 2, the day President Barack Obama and Congress agreed to raise the nation’s debt limit and adopt a plan to enforce $2.4 trillion in spending reductions over the next 10 years.
About $4 trillion was wiped off the value of global equity markets in August, according to data compiled by Bloomberg. The MSCI All-Country World Index fell for a fourth straight month and the Standard & Poor’s 500 Index lost 5.4 percent, including reinvested dividends. The decline was led by companies most-tied to economic growth, including commodity, financial and industrial shares. The Stoxx Europe 600 Index tumbled 14 percent and the MSCI Asia Pacific Index sank 8.3 percent.
The S&P 500 plunged 6.7 percent on Aug. 8 following the U.S. rating cut, the index’s biggest slump since December 2008, and rebounded 4.7 percent the next day after the Fed said it will leave its benchmark interest rate at a record low through at least the middle of 2013.
The swings in U.S. equities were unprecedented in the history of the American stock market, according to data compiled by Birinyi Associates Inc., Bloomberg and Howard Silverblatt, senior index analyst at S&P. Never before has the S&P 500 reversed moves that large in each session over a four-day period, the data show. The trading also marked the first time the Dow Jones Industrial Average moved more than 400 points either up or down for four days in a row.
Confidence among U.S. consumers plunged to the lowest level in August in more than two years as Americans’ outlooks for employment and incomes soured. The Conference Board’s index slumped to 44.5, the weakest since April 2009, from a revised 59.2 reading in July, figures from the New York-based research group showed Aug. 30.
Hiring probably slowed in August and U.S. manufacturing contracted for the first time in two years as consumer confidence waned, economists said before reports this week. Payrolls climbed by 70,000 workers after a 117,000 increase in July, according to the median forecast of 82 economists surveyed by Bloomberg News before Labor Department data Sept. 2.
“There is an expectation that this week’s employment number could be much weaker than the last one,” said David Glocke, head of taxable money market funds in Valley forge, Pennsylvania at Vanguard Group, which oversees about $1.7 trillion. “That could bring the Fed closer to taking additional measures to trying to address some of the economic concerns.”
European confidence in the economic outlook last month plunged the most since December 2008 as a persistent debt crisis roiled markets and clouded growth prospects across the 17-nation euro region.
An index of executive and consumer sentiment in Europe fell to 98.3 from a revised 103 in July, the European Commission in Brussels said Aug. 30. That’s the lowest since May 2010. Economists had forecast a decline to 100.2, according to the median of 29 estimates in a Bloomberg News survey.
“It’s necessary for Europe to answer the questions about what degree of fiscal union will be accepted and how will it manifest itself,” said Toms of ING Investment Management. The lack of resolution creates “turbulence that’s strong enough to down the plane of global growth,” he said.
The euro area’s economic prospects are deteriorating as national governments cut spending in a bid to narrow deficits and tackle the debt crisis. Economic and Monetary Affairs Commissioner Olli Rehn signaled Aug. 29 that the EU may reduce its 2011 growth forecast from 1.6 percent on concerns that financial turbulence could spill into the broader economy.
The dollar advanced 1.3 percent last month, the biggest gain since May, according to the Bloomberg Correlation-Weighted Indexes which track the greenback against nine developed-nation currencies. The currency reclaimed its status as a haven after investors pushed Switzerland’s franc and Japan’s yen to records, prompting the nation’s central banks to take action.
The Standard & Poor’s GSCI Index of decline was led by industrial metals and energy. The gauge plunged as much as 4.5 percent on Aug. 8 and the next day dropped to the lowest level since Dec. 1.
“It’s been a story of precious metals and grains versus the industrial metals and energy,” said Michael Banks, a London-based analyst at Hermes Commodities, which manages $1.9 billion of assets. “The economic outlook is still shaky, particularly in the U.S., and that’s been driving the industrial metals and the energy sector lower.”
Nickel and zinc on the London Metal Exchange led the monthly declines on concern demand may weaken, declining 11 percent and 8 percent, respectively. Gold futures gained 12 percent, the biggest monthly advance since November 2009. Bullion jumped to a record $1,917.90 an ounce in New York on Aug. 23 as investors sought to protect their wealth against financial turmoil.
Oil dropped in New York and London in August, on signs that the global economic recovery is faltering and as the fall of Libyan leader Muammar Qaddafi’s regime sparked hopes that exports from the North African nation will be restored after a six-month suspension.
Coffee traded in New York was the biggest gainer in August, advancing 20 percent, the most since June 2010, on crop damage in Colombia, the second-biggest producer of arabica beans after Brazil. Wheat in Chicago advanced 11 percent as dry weather damaged the crop in the U.S. Corn rallied 15 percent as the U.S. Department of Agriculture cut its estimate for the country’s crop, the world’s biggest, to 12.9 billion bushels (328 million metric tons) from 13.5 billion bushels projected in July.
“High-quality assets were the place to be this month,” said Brian Brennan, a money manager in Baltimore at T. Rowe Price Group Inc., which oversees $132 billion in fixed-income assets. “It’s a function of what’s happened in equity market that’s driven investors to the safety of Treasurys. This dynamic hasn’t delinked with the downgrade.”
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