This Week in Corporate Finance (03/30/12)

Welcome to the end of the first quarter of 2012. Net-net, I think it was one of the better quarters we have experienced since 2007. Although US Treasury yields rallied slightly this week, overall, yields were higher for the quarter (the worst quarter for Treasuries since the fourth quarter of 2010), but for all the right reasons as the economic outlook for the US continues to brighten. The US equity markets performed very well this quarter (the best first quarter for equities since at least 1998) as money continued to move out of safety into riskier, but higher-yielding assets.

This week, the 2-year note yield was down 2bps to 33bps; the 5-year note was down 4bps to 1.04%; the 10-year note was down 2bps to 2.21%; and the 30-year bond was up 3bps to 3.34%. Looking at the entire first quarter, the 2-year note yield was up 9bps; the 5-year note was up 13bps; the 10-year note was up 21bps; and the 30-year bond was up 45bps.

US equity markets were up slightly this week. The Dow  closed this week up +131.31 points at 13,212.04; the NASDAQ hit a new eleven-year high this week of 3,134.17 before falling, to finish the week at 3,091.57; and the S&P 500 peaked at 1,419.15 (a new four-yield high) before dropping to 1,408.47.

We witnessed a record amount of corporate debt issued this quarter. World-wide, we saw the most corporate debt sold since the first quarter of 2009, while here in the US, we observed the most corporate debt issued ever in a first quarter (breaking the record set in the first quarter of 2011). World-wide we saw $1.14 trillion of debt issued, while in the US $427 billion of debt came to market. The fact that yields are near all-time lows on both an absolute and relative basis are bringing issuers out of the woodwork.

Leading the charge this week was LyondellBasell Industries with a two-tranche $3 billion transaction comprised of $2 billion of a 7-year note and $1 billion of a 12-year note. HSBC was also in the market with size, bringing a $2 billion 10-year note to market.

In Europe this week, the credit story was rather muted for the majors, while Portugal and Greece continue to be the most watched sovereigns, though they are moving in opposite directions. The Spanish 10-year note yield was rather unchanged this week being down -2bps to 5.35%; the Italian 10-year security crept up a little higher, +8bps, to close at 5.12%; the French 10-year Oat was slightly better, -6bps, as its yield dropped to 2.89%, while the 10-year German Bund improved by -8bps, driving its yield down to 1.79%.

Portugal and Greece took off in diametrically opposed directions, although by similar magnitudes this week. The Portuguese 10-year security rallied by more than 100bps for the second consecutive week, to drive the yield down to 11.53%. On the other hand, the Greek 10-year bond sold-off by more than 100bps for the second consecutive week, with its yield rising to 21.12%, a reflection of  the market’s still great concern that a further restructuring or default is in the offering in the future.

The potential big news of the coming week will be Friday’s release of the monthly Employment reports. This report always has the possibility of being a market mover but the impact of March’s report may be magnified by the fact that many market participants will be out of the office due to the Good Friday holiday. The consensus is for non-farm payrolls to increase by +201k, while the unemployment rate is to remain unchanged at 8.3%.

Good luck to all as the second quarter of the year begins.

This Week in Corporate Finance (03/23/12)

The market took a bit of a breather this week as concerns about the relative strength of the economic recovery around the world caused money to move towards safety rather than towards risk. The US Treasury market improved after last week’s substantial sell-off. For the week, the 2-year note yield was down 1bp to 35bps (after reaching 39bps last week, its highest level since August); the 5-year note was down 3bps to 1.08% (after hitting an intra-week high of 1.18%); the 10-year note was down 6bps to 2.23% (after rising to 2.39%, its highest level since late October); and the 30-year bond was down 9ps to 3.31% (after hitting 3.49%., its highest level since early September).

The US equity markets were slightly off this week. The Dow, after peaking at 13,289.08, closed this week down -208.35 to 13,080.73; the NASDAQ hit a new eleven-year high this week of 3,087.10 before falling a bit to finish the week at 3,067.92; and the S&P 500 peaked at 1,414.00 (a four-yield high) before dropping to 1,397.11.

The story was somewhat similar in Europe, as in general, stocks were off and the safest sovereigns benefitted. The FTSE was off -110.69 to finish as 5,854.89; the DAX slipped by -198.71 points, to end back under 7K, and close at 6,995.62; and the CAC was down -118.65 to settle at 3,476.18.

In the Fixed-Income market, we saw the stronger names trade better, and the weaker names cheapen. Spain continued its recent decline, as it has traded off all month long. This week the Spanish 10-year note yield rose another 17bps to close at 5.37%, after getting as cheap as 5.54%. The Italian 10-year security also sold-off to finish the week 18bps higher at 5.04%. Both the French and German 10-year notes improved during the week. The French 10-year Oat was better by 7bps, and its yield dropped to 2.95%, while the 10-year German Bund improved by 18bps, driving its yield down to 1.87%.

If one was to graph the path of the 10-year Bund since March 12^th, it would resemble the trajectory of a mortar round. From an initial low yield of 1.74% on the 12^th to an apex of 2.07% on the 16^th, and as the expected drop of a mortar due to the earth’s gravitational pull, the yield fell back down to 1.87% on the 23^rd.

It continues to be an interesting world following the developments in Portugal and Greece. This week, the market considered Portugal to be less-risky, and rewarded 10-year bond-holders with a 108bps rally lowering the yield to 12.58%. On the other hand, even after the recent restructuring, the market penalized investors in Greek debt as the yield on their 10-year security sold-off by 192bps raising the yield back over 20%, to close at 20.10%.

Even with a bit of volatility in the market, Europe experienced one of its busiest corporate debt issuance weeks in over two years. EDF issued 1.5 billion euro in a two-tranche transaction comprised of 1 billion euro of fifteen-year notes and 500 million euro of 25-year bonds. Fiat was also in the market, selling 850 million euro of five-year paper, while Daimler sold 750 million euro of seven-year paper.

This week we’re heading into our first quarter-end of 2012, so the markets may be trading a little on the technical side as the week winds down.

Happily, I’m still alive in my NCAA pool!

This Week in Corporate Finance (03/16/12)

This week seems to be shaping up to be a watershed moment in what seems to be a more clearly defined narrative of the US economy. We may now be advancing out of the financial doldrums of the past several years, possibly into a period of sustained and even robust economic activity. Positive economic reports combined with arguably more favorable comments from the Fed and stronger than expected Bank Stress Test results were the basis for a rather significant flight of money from safety to higher-yielding assets.

In the US, the loser in this equation is the Treasury market (worst losing streak for Treasuries since 2006). For the week, the 2-year US Treasury note yield was up 5bps to 36bps (after reaching 39bps, its highest level since August); the 5-year note was up 22bps to 1.11% (after hitting an intra-week high of 1.15%); the 10-year note was up 26bps to 2.29% (after rising to 2.35%, its highest level since late October); and the 30-year bond was up 22bps to 3.40% (after hitting 3.49%., its highest level since early September).

The beneficiary of this re-allocation of money and re-balancing of risk tolerance was the equity markets as we witnessed many of the indexes reaching multi-year highs. The Dow Jones reached 13,289.08 which was its highest level since June 2007 and the NASDAQ reached 3,060.82 (crossing the 3K level for the first time since June 2001). This is also the first time the Dow has been over 13K, while at the same time the NASDAQ has been over 3K. In addition, the S&P 500 reached 1,405.82, which is the highest it’s been since May 2008.

In Europe, it was a similar story as equity markets rose while money left the safest securities such as German Bunds. The FTSE was knocking at the door of 6K as it closed at 5,965.58; the DAX broke through the 7K barrier to close at 7,194.33; and the CAC closed up, at 3,594.83.

In the European bond market, the Spanish 10-year note was off about 20bps to close at 5.20%; the Italian 10-year note traded weaker by 2bps to settle at 4.86%; the French 10-year Oat was off by 13bps to finish the week at 3.02%; and the 10-year German Bund sold-off by 26bps to close at 2.05%. In contrast, the Portuguese 10-year note actually rallied this week by 19bps to end the week at 13.66%.

Greece continues to be Greece. We now have to look at Greek yields through the prism of their recent restructuring. Greek 10-year bonds that closed last week at 36.55% opened Monday morning at 18.45% and finished better this week at 18.18%. It’s interesting to note that even with the restructuring; Greece is still trading cheap to Portugal.

With all the volatility and uncertainty in interest rates, it wasn’t surprising that corporate bond issuance couldn’t keep pace with last week’s record pace. Of note was Vodafone’s $1 billion 5-year note issuance.

The money-markets were back in the spotlight again this week, and it wasn’t just because of the potential new reforms concerning money-market funds that may be coming down the pike. With all the bullish news that was released this week, the market is now pricing in the Fed to start tightening interest rates sooner than previously expected.  Looking at the futures market, a Fed tightening is now being priced into the September/October 2013 time period, rather than an early 2014 time period.

A Fed tightening prior to late 2014 wouldn’t necessarily be a contradiction to what the Fed reiterated earlier this week. The Fed has stated that it expects interest rates to stay extremely low through the end of 2014. They did not say they wouldn’t tighten before the end of 2014. It is interesting to note that these two statements are not mutually exclusive. By historical standards, short-term interest rates of 1%, 2%, or even 3% would be considered extremely low. Something to think about while watching March Madness.