As Facebook’s giant IPO comes to market, record low yields in the bond market are warning of more trouble ahead for financial markets.
The hoopla surrounding the $16 billion offering was not enough to stave off a wave of selling in stocks Thursday. As stocks fell sharply into the market close, buyers piled into the long end of the bond market, driving the 10-year yield to a record low close of 1.702 percent. The move to record lows was mirrored in other markets as investors sought safety in German bunds and U.K. gilts.
Traders said the worst fears about Europe were a rising point of concern Thursday as investors reassessed their positioning. While it is not generally expected, there was increasing talk of a sloppy Greek exit from the euro zone, which could kick off a run on banks in other periphery countries if European regulators don’t act quickly to stem it.
“This is not a new idea. It just feels like it’s more a probability this time because they’ve exhausted so many more alternatives and that obviously is what’s rattling markets,” said George Goncalves, Treasury strategist for Nomura Americas.
The growing worries make the meeting of G-8 leaders at Camp David Friday and Saturday more important than usual for markets, as Greece is expected to be a major topic of discussion. President Obama is expected to press European leaders to act aggressively and to stay on the road of more integration.
Besides Greece, the factors driving investors into the long end of the bond market Thursday were the selloff in stocks, and a surprisingly weak report from the Philadelphia Fed. The market was also concerned about Spanish banks and the overhang of a possible downgrade by Moody’s. After the closing bell, Moody’s announced the expected downgrade of Spanish banks, another negative hurdle for markets. Moody’s has had global financial institutions and dozens of Western European banks under review and is expected to continue to announce the results through the end of June.
The S&P 500 fell 19 points Thursday, closing at 1304, while the Dow lost 156 points to finish the day at 12,442.
“We’ve got the market breaking through many levels of technical support this week. I think the direction is still down, primarily driven by the weak economic data and what’s going on in Europe,” said Gina Martin Adams, Wells Fargo Securities institutional equities strategist.
“The market is technically weak. We broke 1343 [on the S&P]. We had a little support between 1320 and 1330 and we busted through that. We might get some support at 1300, if we’re lucky,” said Adams. “There’s not a lot of support from here ... which could take us easily back down to 1250 on the index. It doesn’t mean we get there, but we’re going to have to find some other case for stocks other than the technical case.”
Meanwhile, Nasdaq will begin to trade Facebook under the symbol "FB" at around 11 a.m. ET.
“This history of IPOs is that they do really well in the first couple of days and first couple of weeks, then they underperform," Adams said. "If they [Facebook] follow historical patterns, it might even lift the market a little tomorrow."
Goncalves said investors are changing their view that U.S. rates could rise, and the sharp moves in Treasurys were likely the result of that repositioning. “If you think you’re going to be more scared next week than this week, then you’re going to unwind,” he said.
Even with the race into the longer-duration Treasurys, the move in bonds Thursday was not an across-the-board rush into Treasurys. Yields on the shorter duration 2- and 3-year Treasurys rose as investors sold those issues and moved out the curve.
“I think this is simply because people say the value is at the back end of the curve,” and they are moving from the short end to the long end, said CRT Capital chief Treasury strategist David Ader.
Traders said there was talk that the "steepener" unwind (trade out of shorter duration Treasurys) was the work of one major bank through its London office. The result was a flatter curve.
Ader said there was a technical break in the 10-year that makes it possible for the yield to keep making new lows down to 1.50 percent. He said the market was also reacting to the fact that the Fed minutes Wednesday showed that the number of Fed officials who said further quantitative easing might be necessary went from “a couple” in March to “several” at April’s meeting.
“I think everyone is coming around in a relatively short period of time, saying ‘holy moly’ — this is a risk off situation. We had false dawns with LTRO 1 and LTRO 2,” said Ader, referring to the European Central Bank’s bank liquidity program. “They helped for the moment. You withdraw that drug and we’re just back to where we were.”
Ader said the market is also beginning to anticipate issues with the U.S. “fiscal cliff” that Congress must address by the end of the year. “So after we get through all this and Greece, we have that to talk about,” he said.
Greece’s failure to form a coalition government after its May 6 election sends Greek voters back to the polls in June. However, there is little optimism Greeks will select candidates who will form a government that would support the austerity program required under its bailout agreements.
Alexis Tsipras,the head of the Coalition of the Radical Left, told the Wall Street Journal Thursday that Europe would not cut off Greece’s funding, and if it does, Greece could repudiate its debts. He also said a financial collapse of Greece would bring down the rest of the euro zone. Those comments added to the market’s worries, especially as Tsipras’ party looks set to win the most votes in new elections, according to recent polls.
Financial stocks were at the heart of the pain in global equities markets. The S&P financial sector was a leader of Wall Street’s decline, with the S&P financial sector losing 2.1 percent.
JPMorgan led the decline, as traders speculated about its efforts to unwind the trades that are reported to be resulting in bigger losses than the $2 billion it disclosed. The sector is now down more than 6 percent for the week.
“I would say it’s the portfolio protection going on today,” said Pete McCorry, who trades bank stocks at Keefe Bruyette. “I would not say it’s panic, doomsday scenario, but I would say there’s portfolio protection going on in this market.”