Trading was volatile for all asset classes this week, including bonds. The ten-year began the week at 2.83%, traded at its lows of 2.33% early Friday morning, before selling off during Friday’s session to 2.56% as of Friday’s close. The two-year made new all time lows three times this week, trading at a record yield of .25%, before ending at .29%. For those who like to impress their friends with fun bond factoids - .25% on Friday translated into a price of 100.25, a very slight premium. At a price of 100.75 the same bond has a yield of 0.00%. I thought we were done exploring unchartered territory in rates - I guess I was wrong.

Corporate bonds underperformed similar maturity Treasury bonds for the week as credit spreads widened. The investment grade credit default swap index rose by 12% for the week, the biggest increase since May 2010. The index rises as traders rush to buy protection against default on a broad basket of corporate bonds.

It was really the poor economic data that drove the market this week, and culminated in the down 5% day for stocks on Thursday. It was reported on Tuesday that personal consumption for June fell for the first time since September 2009, which lead to a string of analyst downgrades for US GDP growth even further below the Fed’s current forecast of 2.7%-2.9% real growth in 2011.

Adding to the pain was another burst of concern about Europe as the spread between Italian government bonds and German bunds reached record wides. The news going into the weekend is that the Italian government has reached a deal to balance the budget by 2013, which qualifies them for more support from the ECB. Let me clarify that in this case support means the ECB will buy Italian bonds in the open market to drive rates lower, which in reality does little to drive down borrowing rates and absolutely nothing to solve the growing problem of insolvency across Europe.

Next week will surely be highlighted by the FOMC meeting that wraps up on Tuesday, and the Chairman’s press conference that will follow. With expectations for additional asset purchases higher than ever, it is shaping up to be a monumental FOMC meeting.

Have a great weekend. 

Cliff J. Reynolds Jr., Investment Analyst