Highlights of This Week’s Update:
- Take extra caution depending on where you live and what vehicle you own.
- U.S. stock indices are now basically flat so far in 2015.
- Interest rates on Treasuries continue to move higher along with mortgage rates.
- Rates in Europe also on the rise.
Read on for further details………………………………………………………
Where You Live and the Vehicle You Own Can Make a Difference:
Source: Priceonomics (Hat tip: Penny Wolfe)
The Markets:
Last week produced negative returns for the major U.S. stock indices and they are now up just slightly through last Friday on a year-to-date basis. The Dow Jones Industrial Average ended last week .9% lower, and is now up just .15% for the year through Friday, June 7th. The S&P 500 is 1.65% higher than at the beginning of this year. (MarketWatch)
Interest rates have become the story of late, with U.S. Treasuries yields continuing to climb higher. The yield for the 10 year U.S. Treasury ended the week at 2.41%, compared to 2.17% on 12/31/14. This has also brought mortgage rates higher. The average 30 year fixed rate mortgage now ranges from 4-4.375%, while the 15 year fixed rate is now 3.25-3.5%. (U.S. Treasury, Bankrate.com)
The bond market can and does influence other markets, including the stock market. In other words, create uncertainty in the bond market, and tremors can spread to stocks.
The latest example was last Thursday, when European Central Bank President Mario Draghi said “we should get used to periods of higher volatility,” as he answered a question about the recent surge in euro-zone bond yields, especially German yields (ECB press conference, ECB website).
His comment caused the 10-year yield on the German government bond to jump as high as 0.99% in intraday trading last Thursday (Wall Street Journal). Stocks took a beating that day, mostly in response to rising Treasury yields. Note the relationship between U.S. and German yields in the chart below.
The 10-year German bond is backed by the German government. The bond offers payment of principal and interest but can change in value based on changes in interest rates and fluctuations in currencies. Factors including, but not limited to, default and the change in the value of currencies have the potential to impact principal repayment at maturity. Past performance is no guarantee of future performance.
The sharp uptick in bond yields in Europe has encouraged some selling of U.S Treasuries, though the move has not been as accentuated on a percentage basis. The result: the 10-year yield is at its highest level of the year. (Higher bond yields bring lower bond prices) That in turn has created some jitters in stocks and pushed up mortgage rates (Freddie Mac survey).
There’s been plenty of debate as to why German yields have jumped since the end of April, but everything from firmer growth in Europe (Eurostat), a slight uptick in euro-zone inflation (Eurostat), a sudden shift in sentiment on yields, and a lack of liquidity to absorb the sales have been blamed. What is clear – what happens in Europe doesn’t always stay in Europe.
We appreciate the privilege to be of service and look forward to working with all of you in the years to come. We wish you all a great summer ahead!
Warmest Regards,
Your TEAM at F.I.G. Financial Advisory Services, Inc.
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1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results.
3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results.
5 New York Mercantile Exchange front-month contract; Prices can and do vary; past performance does not guarantee future results.
6 London Bullion Market Association; gold fixing pricing at 3 p.m. London time; Prices can and do vary; past performance does not guarantee future results.