This Week in Corporate Finance (12/20/13)

This has been a truly fascinating week, and I believe it was one of the most meaningful in the past six years. For the first time since the beginning of the Financial Crisis back in August 2007, the Federal Reserve took tangible action that reinforces the narrative of a strengthening US economy.

 

The Fed, in a bit of a surprise, announced they would begin to “taper” their monthly purchases of US Treasuries and Mortgage-backed securities. Many, including yours truly, believed the Fed would wait until March, after the new Fed Chairwoman had been installed. Never discount the ability of the Fed to chart its own path.

 

The market responded to the news of the modest “tapering” much as a six year-old greets Christmas morning, with much happiness and joy. Stocks reached new all-time or multi-year highs while the response of the bond market was relatively muted.

 

The Dow hit a new all-time high of 16,287.84 (it’s now up +22.06% over the past year); the S&P 500 soared to 1,823.75 (up +26.07% over the past twelve months); and the NASDAQ reached 4,111.93 (up +34.65% over the past 365 days and its highest level since 2000).

 

The big news in the US Treasury market was the flattening of the yield curve. The yields on the short-end and the belly-of-the-curve are rising while the longer-end of the curve is dropping. Over the past two weeks, the 2-year yield is up +7bps to 37bps; the 5-year note yield is up +17bps to 1.67%; the 10-year note yield is unchanged at 2.88%; and the 30-year bond yield is actually down -9bps to 3.82%.

There are a couple of factors in play that are causing the flattening to occur. First, the market now believes the Fed is actually going to start raising interest rates a little bit sooner than it had. Given the 2-year UST yield is trading at 37bps, the market is inferring that the Fed might start increasing the Fed Funds rate in the late 2014/ early 2015 time period. Second, the belly-of-the-curve has backed-up mainly on concerns of supply. There is a large amount of 3-to-7 year debt to be issued in the near future, and given the increased optimism for the US economy, higher yields may be required for investors to participate. Third, the back-end of the UST yield is actually rallying because there is currently no threat of inflation on the horizon and because the Fed seems to be taking a gradual approach to its “tapering”.

 

On that final note, many market participants believe the Fed will reduce its purchases of Treasuries and MBS in a very gradual and orderly fashion. If the Fed were to reduce its purchases by -$10 billion per each FOMC meeting in 2014, they would complete the process by the end of 2014, and position them to start raising the Fed Fund rate as soon as late 2014/ early 2015.

 

Not to be lost in all the Fed news, but here in the United States we passed our first budget out of a divided government in 27 years (we’re talking 1986, think “West End Girls” by Pet Shop Boys). So other than battling over the debt ceiling, the budget shouldn’t be a government-closing issue for the next year or so.

Happy Holidays!

This Week in Corporate Finance (11/29/13)

As we wrap up the eleventh month of the year, the optimism continues to build for 2014. The market continues to debate when the Fed will begin to “taper”, but it’s now a matter of “when” rather than “if” in the coming months, barring some unforeseen event (a major caveat).
 

US Treasuries lost a bit of their “safe-harbor” premium and suffered their first monthly loss since August; only the 2-year note’s yield was lower. For the month, the 2-year note yield was down -3bps to 28bps; the 5-year note yield was up +11bps to 1.37% (after being as high as 1.45%); the 10-year note yield was up +26bps to 2.74% (after being as high as 2.79%); and the 30-year bond yield was up +21bps to 3.81%.

 

Over the past year, the yield curve has steepened significantly. The 2-year yield is up +3bps; the 5-year note yield is up +74bps; the 10-year note yield is up +114bps; and the 30-year bond yield is +103bps.It is interesting to note that T-bill yields are actually lower by -5 to -3bps over the same time period.

 

The stock market continues to reflect the growing optimism on the part of investors. The Dow reached a new all-time high of 16,174.51 (up +23.53% over the past year); the S&P 500 climbed to its new all-time high of 1,813.55 (up +27.53% over the past twelve months); and the NASDAQ hit a new thirteen-year high of 4,069.70 (up +34.79% over the past 365 days). In Germany, the DAX touched a new all-time high of 9,424.62 (up +27.08% since November 2012) and in Japan, the Nikkei soared to its highest close in six years at 15,727.96 (up +66.60% over the past year, its largest yearly gain since 1972).

 

As we witness this outbreak of optimism, the FX markets are taking some interesting twists and turns. In the UK, the pound rose to its highest level versus the US dollar since August 2011, at $1.6384, as the UK economy is seen as potentially growing faster than the US. On the other side of the coin, the Japanese yen fell to its lowest point versus the US dollar since late May at 102.61/USD.

 

US oil prices continue to trend lower on fundamentals. WTI touched its lowest price since July at $92.24/barrel. Supply seems to be pressuring prices lower, as it was announced that the US is producing over 8 million barrels a day for the first time since 1989 (think “Love Shack” by the B-52’s).

 

There were a couple of interesting actions involving sovereign credit risk this week. S&P upgraded the outlook for Spain from negative to stable and the Netherlands were dropped out of the exclusive “AAA-club” with their credit rating being lowered to “AA+” from “AAA”. There are now only thirteen “AAA’s” recognized by S&P (the US is “AA+”).

 

All eyes will be on the upcoming Employment report to be released Friday December 6^th and the final scheduled FOMC meeting to be held on December 17^th & 18^th.

This Week in Corporate Finance (11/15/13)

This week we continued our recent steady march towards the Dow at 16k, the S&P 500 at 2k (though honestly, we do need to break 1,800 first) and the NASDAQ at 4k. There is growing optimism that the US economy will continue to improve and at the same time, the Fed seems to be in no rush to start their “tapering” operations.
 

The Dow reached yet another all-time high this week of 15,962.66, which is up +27.12% over the past year and +143.36% since the low of March 09, 2009. The S&P 500 touched a new all-time high of 1,798.187, up +32.75% over the past twelve months and up +165.26% since its March 2009 low, and the NASDAQ hit a 13-year high of 3,985.11, up +40.39% over the past 365 days and up +213.74% since its 2009 low.

 

US Treasury yields were lower across the board this week after Fed chairman-designate Yellen provided reassuring words that the Fed wouldn’t start “tapering” immediately. Given the recent positive economic news, some parts of the market started to price in a “tapering” as soon as the next FOMC meeting on December 17^th & 18^th. Now the market is a bit more comfortable with the idea of a “tapering” that begins in March 2014.

 

For the week, the 2-year note yield was down -2bps to 29bps (after being as high as 33bps); the 5-year note yield was down -7bps to 1.34% (after being as high as 1.45%): the 10-year note yield was down -4bps to 2.70% (after being as high as 2.79%); and the 30-year bond yield was down -6bps to 3.79%. With the 2-year TSY at 29bps, the market isn’t pricing in a tightening of interest rates until mid-2015.

 

The yield curve is at its steepest slope in over two years. Historically, the market has perceived a steeper yield curve as indicative of accelerating economic activity.

 

Mortgage rates continued their recent upward trend. The average 30-year fixed-rate mortgage rose to 4.35% this week (up +100bps from a year ago) and the average 15-year fixed-rate mortgage rose to 3.35% (up +70bps from a year ago).

 

The market for new issuance of corporate bonds remains wide open. Leading the pack this week was Royal Dutch Shell (the world’s largest company as a function of revenue) with their $4 billion four-tranche offering consisting of $750 million of a two-year FRN, $1 billion of a three-year FRN, $1 billion of a three-year note and $1.25 billion of a five-year note. Volkswagon AG (Global #9 company) raised $2.15 billion with its own four-part transaction comprised of $400 million of a two-year FRN, $750 million of a three-year FRN, $500 million of a three-year note and $500 million of a five-year note.

 

Both oil and gold continued to flounder about looking for some direction, and ended the week basically unchanged at $93.73/barrel and $1,287.80/oz, respectively. Gasoline prices continue to drop, falling to near three-year lows. Some US customers have already seen prices drop below $3/gallon.

 

On the very short-end of the credit curve, 3-month LIBOR continues to trade near its all-time low yield of 23.59bps.

 

This Week in Corporate Finance (11/08/13)

The one-week delayed Employment report was the bit of icing on the birthday cake of economic good news we received this week. The Payroll report was substantially stronger than expected (+204k versus +120k consensus), and both the August and September reports were revised up (by +45k and +15k, respectively). The GDP report for the third quarter came in stronger than expected (+2.8% versus +2.0% consensus) and the Initial Claims report ticked lower to 336k.

 

The stock market responded to this burst of good news by reaching new highs or near-highs. The Dow peaked at 15,797.68 (up +22.24% over the past year), the S&P 500 continues to hover near its all-time high, currently at 1,770.54 (up +28.34% over the past twelve months), and the NASDAQ is at 3,919.23 (up +35.17% over the past 365 days) and near its 13-year high.

 

With the market now contemplating whether the Fed might accelerate the start of its “tapering” program, it wasn’t surprising to see US Treasuries take one on the chin. For the week, the 2-year note yield was unchanged at 31bps (after dropping to a low of 28bps); the 5-year note yield was up +4bps to 1.41% (after being as low as 1.30%): the 10-year note yield was up +12bps to 2.74%; and the 30-year bond yield was up +16bps to 3.85%. Mortgage rates reversed their downward trend. The average 30-year fixed-rate mortgage rose from its four-month low to 4.16% and the average 15-year fixed-rate mortgage rose to 3.27%.

 

All eyes will be on the final FOMC meeting that occurs on Tuesday December 17^th and Wednesday December 18^th, to see if the Fed hints at what its future actions may be.

 

Commodities definitely took a hit, losing a bit of their shine as safe havens for investors. Gold fell to a recent low of $1,280.50/oz, dropping -26.30% over the past year. Silver is now down -34.31% over the past twelve months. Oil touched a five-month low of $93.37/barrel for WTI. A glut of supply is trumping the increased economic activity in the US and driving prices lower. A gallon of gas in the US is near its lowest level in almost two years at an average price of $3.211/gallon.

 

Corporate CFOs are locking in funding costs before yields rise even higher as the window for debt issuance is closing as we approach the end of 2013, and the beginning of the holiday season. Philip Morris issued $2 billion via a three-tranche deal comprised of $750 million of a 5-year note, $500 million of a 10-year mote, and $750 million of a 30-year bond. Mosaic did its own three-tiered $2 billion transaction. It consisted of $900 million of a 10-year note, $500 million of a 20-year note, and $600 million of a 30-year bond.

 

Over in Europe, we received two bits of interesting news. First, in a bit of a surprise, the European Central Bank (ECB) lowered its refinancing rate by -25bps to a record low of +25bps. Only 3 out of 70 economists in one survey saw this action coming. The argument given for this reduction in yields was simply the fear of deflation in the euro-zone.

 

The other piece of news was that S&P lowered the sovereign credit rating of France from “AA+” to “AA”. France was a “AAA” credit as recently as January 2012. 

This Week in Corporate Finance (11/01/13)

The basic takeaway from this past week is that the US economy continues to grow but at a not-so-fast pace as to raise fears of inflation. The FOMC met and reinforced their recent message of a steady-as-she-goes approach to changing the current level of stimulus. It seems most likely that the Fed won’t start to “taper” until late first-quarter 2014, at the earliest.

 

The back-end of the US Treasury market sold-off a bit, while the front-end was relatively unchanged. It’s interesting to note that the T-bills (3mo, 6mo, and 12mo) are actually yielding -6bps to -8bps less than a year ago with the 2-year note yielding only +3bps more from twelve months ago.

 

Over the past week, the 2-year note yield is up +1bp to 31bps; the 5-year note yield is up +10bps to 1.37%: the 10-year note yield is up +12bps to 2.62%; and the 30-year bond yield is up +10bps to 3.69%. Mortgage rates have continued to drop. The average 30-year fixed-rate mortgage fell to a four-month low of 4.10% and the average 15-year fixed-rate mortgage dropped to 3.20%.

 

The US stock market continues to cruise along, reaching new higher highs. The Dow touched a new all-time high of 15,721.00 and is currently up +18.11% over the past year; the S&P 500 reached its new all-high of 1,755.88 and is up +23.49% over the past twelve months; and the NASDAQ soared to a new 13-year high of 3,966.71 and up 29.87% over the past 365 days.

 

Corporate issuers took advantage of the recent drop in interest rates and came to the market with a bit of gusto. Coca-Cola led the pack with its largest offering ever, a $5 billion five-tranche transaction. The structure was comprised of $500 million of a three-year FRN, $500 million of a three-year note, $1.25 billion each of a 5-year and 7-year note and $1.5 billion of a ten-year note. Altria issued $3.2 billion in a two-part offering that consisted of $1.4 billion of a ten-year note and $1.8 billion of a thirty-year bond. Proctor & Gamble sold $2 billion via a three-tranche offering made up of $500 million of a three-year FRN, $500 million of a three-year note and $1 billion of a five-year note.

 

Oil prices continued their recent 4-week slide with TWI falling thru the $95/barrel floor, dropping to as low as $94.36/barrel. This is the lowest the price of oil has been since June, and it is a reflection of growing supply and a strengthening US dollar. The price of gold dropped to a 2-week low, cotton prices touched their lowest levels since January, and coffee prices are in their longest slump since 1972 (think “American Pie” by Don McLean).

 

Talk of the ECB lowering rates, as soon as next week helped to cause a bit of a sell-off in the Euro. The Euro fell by -2.3% to a low of $1.3480 its worst five-day performance since July 6, 2012.

 

In other Central Bank news, the Reserve Bank of India (RBI) raised their repo rate for the second time in less than two month (up +25bps to 7.75%) to try and curb the recent increase in inflation. In September, wholesale prices in India were up +6.46%, while retail prices were up +9.84%.

 

I hope everyone who attended AFP’s Annual Conference in Las Vegas had a wonderful time. Please start preparing your proposals for review for our next Conference in Washington, DC in November 2014. The competition for speaking slots seems to increase every year. We tend to end up with the best and most insightful sessions via our peer review, with the attendees as the true beneficiaries.

 

This Week in Corporate Finance (07/12/13)

Welcome to the start of the second half of CY2013. I normally don’t like to call when we have started a new chapter in the ongoing saga of our economic recovery, but I’ll go out on a limb and state we have turned a significant page. The Employment report on Friday reinforced the new narrative of the US economy being able to sustain itself on an ongoing basis and for the Fed to begin to reduce the amount of monetary stimulus it has been providing in the relatively near future.  With the US economy now producing its greatest rate of job creation since 2005, markets around the world are adjusting to this new “normal”.

I think it’s safe to say the US Treasuries have been on the losing end of all this positive news regarding the US economy. Over the past three weeks, the 2-year note yield is up +12bps to 39bps (after being as high as 43bps); the 5-year note yield is up +56bps to 1.59% (after being as high as 1.60%); the 10-year note yield is up +61bps to 2.73% (its highest level since August 2011); and the 30-year bond yield is up +39bps to 3.69% (its highest level since August 2011).

A few other Treasury-related observations: T-bill yields continue to hold tight, as they are still actually lower than where they were a year ago; the jump in the UST 2-year yield implies that the Federal Reserve will start to increase its Fed Funds Rate in the second half of 2014; and with the back-up in yields, the 30-year swap spread has turned positive for the first time since August 2009.

Corporate Treasurers around the world have tapped the brakes on debt issuance of late as the spike in funding costs has caused a bit of a slowdown. Worldwide, debt issuance was at its slowest rate since December 2011 at $196.8 billion.

Commodities that had been seen as safe havens during the financial crises continue to rack up losses. Gold fell to as low as $1,206.90/oz, not far from its recent three-year low of $1,179.40/oz. Silver has traded as low $18.67/oz and has lost over -33% of its value over the past twelve months.

Crude oil has been moving in the opposite direction of late, touching a 14-month high of $103.32/barrel. Oil touched its 52-low week low of $86.29/barrel back in mid-April. The improving economic situation in the US, plus political uncertainty in Egypt has helped the recent surge in oil prices. 

Net-net, US equity prices have been trading in a relatively tight range since hitting all-time and multi-year highs back in late May. The Dow closed the week at 15,135.84 (off -2.6% from its record high), the S&P 500 settled the week at 1,631.89 (off -3.3% from its all-time high) and the NASDAQ ended the week at 3,464.11 (off -1.5% from its 12 ½ year high).

This Week in Corporate Finance (07/05/13)

Welcome to the start of the second half of CY2013. I normally don’t like to call when we have started a new chapter in the ongoing saga of our economic recovery, but I’ll go out on a limb and state we have turned a significant page. The Employment report on Friday reinforced the new narrative of the US economy being able to sustain itself on an ongoing basis and for the Fed to begin to reduce the amount of monetary stimulus it has been providing in the relatively near future.  With the US economy now producing its greatest rate of job creation since 2005, markets around the world are adjusting to this new “normal”.

I think it’s safe to say the US Treasuries have been on the losing end of all this positive news regarding the US economy. Over the past three weeks, the 2-year note yield is up +12bps to 39bps (after being as high as 43bps); the 5-year note yield is up +56bps to 1.59% (after being as high as 1.60%); the 10-year note yield is up +61bps to 2.73% (its highest level since August 2011); and the 30-year bond yield is up +39bps to 3.69% (its highest level since August 2011).

A few other Treasury-related observations: T-bill yields continue to hold tight, as they are still actually lower than where they were a year ago; the jump in the UST 2-year yield implies that the Federal Reserve will start to increase its Fed Funds Rate in the second half of 2014; and with the back-up in yields, the 30-year swap spread has turned positive for the first time since August 2009.

Corporate Treasurers around the world have tapped the brakes on debt issuance of late as the spike in funding costs has caused a bit of a slowdown. Worldwide, debt issuance was at its slowest rate since December 2011 at $196.8 billion.

Commodities that had been seen as safe havens during the financial crises continue to rack up losses. Gold fell to as low as $1,206.90/oz, not far from its recent three-year low of $1,179.40/oz. Silver has traded as low $18.67/oz and has lost over -33% of its value over the past twelve months.

Crude oil has been moving in the opposite direction of late, touching a 14-month high of $103.32/barrel. Oil touched its 52-low week low of $86.29/barrel back in mid-April. The improving economic situation in the US, plus political uncertainty in Egypt has helped the recent surge in oil prices. 

Net-net, US equity prices have been trading in a relatively tight range since hitting all-time and multi-year highs back in late May. The Dow closed the week at 15,135.84 (off -2.6% from its record high), the S&P 500 settled the week at 1,631.89 (off -3.3% from its all-time high) and the NASDAQ ended the week at 3,464.11 (off -1.5% from its 12 ½ year high).