Committee for a Responsible Federal Budget

MARKETWATCH THIS WEEK Is It Good to Be A Safe Haven?

May 14, 2010 | Economics

U.S. markets continued to be dominated this week by the continuing roller coaster ride from the Greek (and eurozone) debt crisis. More positive U.S. economic news appeared to be less important. The cause of last week’s stunning drop and subsequent recovery in the U.S. stock market is still not well-understood.

U.S. bond markets (and, stock markets today) have continued to be buffeted by safe haven ups and downs, as global markets continue to assess the situation in Europe. At the beginning of the week, European authorities were able to finally get ahead of the curve. For the U.S., positive global market reactions to the surprisingly massive ($1 trillion) EU and IMF rescue package diminished the safe haven effects that had boosted Treasury prices and lowered yields the previous week. So we saw Treasury yields on the 10 year note reverse direction and head upwards again, although yields did not return to higher rates which had prevailed this year prior to the Greek sovereign debt “shock”. However, on Thursday, the initial positive global market reaction to the Greek situation appeared to have shifted, most likely reflecting fears over the impact of the announced fiscal austerity package on eurozone growth (with Portugal and Spain’s new austerity packages now part of the mix), plus concerns over Greece’s ability to sustain a tough austerity program. More fundamental fears over the eurozone’s fiscal management capabilities reappeared, as well. By mid-day Friday (May 14), interest rates on medium and long-term Treasury instruments were declining again as investors increased safe haven holdings by turning more to U.S. Treasury assets.