This Week in Corporate Finance (04/27/12)

This week was certainly chock-full of news. Between the two-day FOMC meeting, the 1Q GDP report, failing governments in Europe, and credit downgrades, it seems like we are experiencing our third consecutive spring of “now is the winter of our discontent”. After a first quarter of optimists beginning to outnumber the pessimists, this week certainly reinforced the scenario of a world where the US is growing, but at a substandard pace; Europe is in an economic freeze; and the BRICs and the Developing World are continuing to grow, but at a slower pace.

Safety and staying on the sidelines was the name of the game as both US Treasuries and German Bunds were the destination of choice for those focused on return of principal rather than return on principal. For the week, the 2-year Treasury note yield was unchanged at 26bps (its low of the week was 25bps); the 5-year note was down 1bp to 83bps (its low of the week was 81bps); the 10-year note was down 5bps to 1.93% (its low of the week was 1.88%); and the 30-year bond was unchanged at 3.12% (its low of the week was 3.06%).

In Germany, Bunds touched all-time low yields this week. The 10-year Bund was down -1bp to 1.70%, after falling to its all-time low yield of 1.633% earlier in the week; the 5-year Bund was down -3bps to 64bps, after being as low as 60.1bps, and the 2-year Bund was down -4bps to 10bps, after falling to its lowest yield ever of 7.5bps. Currently, the 2-year German Bund and the 3-month US Treasury bill are at parity. It seems that low yields are here to stay until we detect some kind of robust growth or some inkling of inflation developing.

The rest of Europe had an interesting week, starting with Spain which was downgraded by S&P. S&P lowered Spain’s long-term rating by two notches from “A” to “BBB+” and they also lowered their short-term rating from Tier-1 to Tier-2 (A-1 to A-2). Of interest though, the Spanish 10-year bond actually rallied a bit to finish the week -8bps lower at 5.88%, still flirting with that psychologically important 6% level. Speaking of the 6% threshold, Italy’s 10-year note yield has been creeping closer to that level, reaching as high as 5.784% before ending the week relatively unchanged at 5.64%. France is experiencing a bit of political uncertainly, but investors still view France as relatively safe, and rewarded their 10-year Oat with a -10bp rally, pushing its yield back down through 3% to 2.99%.

Staying with the improving bond yield theme, yields were lower in Portugal as their 10-year rallied -124 bps to drop from 11.73% to 10.49%. Even Greece improved this week as their 10-year note yield fell -79bps to close the week at 20.55%. The Greek 10-year was recently trading as high as 22.31% and the Portuguese 10-year recently touched 18.29% (back in late January).  

The US equity markets improved as investors were more focused on earnings than economic developments and news out of Europe. The Dow finished the week up over 200 points to close at 13,228.31 (not far off its recent high of 13,29711; the NASDAQ was up 68.75 points to finish at 3,069.20; and the S&P 500 was back over 1,400,  ending the week at 1,403.36, up 24.83 points.

On the corporate debt issuance front, Molson Coors was in market with a $1.9 billion three-tranche transaction comprised of $300 million of a 5-year note, $500 million of a 10-year note, and $1.1 billion of a 30-year bond. This was the first time Molson Coors has been in the US dollar market since 2007.

All eyes will be on the upcoming Employment report to be released on Friday May 4^th. Will it help us divine where the economy is heading, or will it be another report that is neither fish nor fowl?   The consensus is for an increase of +165k nonfarm jobs and the Unemployment rate to be unchanged at 8.2%.

This Week in Corporate Finance (04/20/12)

This week we pretty much just bumped along, fluctuating between feelings of comfort about the direction of the US economy and the situation in Europe, and feelings of anxiety about the direction of the US economy and the situation in Europe. Until we receive some insight that would indicate we are either accelerating or decelerating to some significant degree, I suspect we will be stuck in the doldrums.

For the week, the 2-year Treasury note yield was down 1bp to 26bps (its low of the week); the 5-year note was down 1bp to 84bps (its low of the week was 82bps); the 10-year note was down 2bps to 1.98% (its low of the week was 1.94%); and the 30-year bond was down 1bp to 3.12% (its low of the week was 3.10%). The US equity markets also just bounced around; the Dow finished at 13,029.26, the NASDAQ ended at 3,000.45, and the S&P 500 ended at 1,378.53.

The story was very similar in Europe. Spain continues to have the market’s attention as the yield on its 10-year note continues to dance around the six percent mark. This week, the note traded as high as 6.16% and as low as 5.72%, before ending the week basically unchanged at 5.96%. The Italian and French 10-years notes were weaker for the week, giving up approximately 15bps each, to close the week at 5.67% and 3.09%, respectively. Germany continues to be the bastion of strength on the continent, as the 10-year Bund improved by 3bps to end the week at 1.71%. Portugal and Greece were somewhat out of the spotlight this week. The Greek 10-year note was relatively unchanged, off 12bps to close at 21.25%, while the Portuguese 10-year enjoyed a bit of a rally with its yield improving by -83bps to finish at 11.73%.

Brazil somewhat surprised the market this week by lowering its Selic rate by 75bps to 9.00% from 9.75%, which is only slightly above its all-time record low rate of 8.75%. They also left the door open for more easing in the future. Brazil’s GDP slowed to 2.7% last year.

For the first time in three years, India lowered its interest rates. The Reserve Bank of India (RBI) lowered its repo rate by 50bps from 8.50% to 8.00%. Like Brazil, the RBI is concerned that economic growth is slowing too quickly.

Corporate bond issuance is at its slowest pace for 2012 which is not surprising, given the record-setting pace of the first quarter. That said, we still witnessed a couple of significant deals starting with Lowe’s, which brought its largest transaction on record to market this week. It was a $2 billion three-tranche deal comprised of $500 million of a 5-year note, and $750 million each of a 10-year and a 30-year security. AutoZone was also in the market with $500 million of a 10-year note. Corporate yields are currently at their all-time lows on an absolute basis, according to the BAML Master index which stands at 3.392%.

The price of natural gas continues to look for a bottom. This week the price set another ten-year- plus record low of $1.90/mBTU. Prices for Nat Gas haven’t been this low since Destiny’s Child had a hit with Bootylicious.

We will be looking forward to the upcoming two-day FOMC meeting to glean some insight as to where the market might be heading for the rest of the year.

This Week in Corporate Finance (04/13/12)

We certainly experienced what can only be described as a see-saw week. It was no surprise that we watched the US equity markets slump on Monday in response to last Friday’s Employment report (most of Europe was closed due to the Easter holiday).  US stock indexes were off about -1%, while the US Treasury market was only slightly better, the muted response in Treasuries due to the fact they had had the opportunity on Friday to response to the weaker-than-expected Payroll number.

On Tuesday, concerns about a slower economy and fresh fears about Europe only served to accelerate the flight from risk. US stock indexes fell another -1.7%, while US Treasuries rallied further. It was a similar situation in Europe. Wednesday saw a bit of a reversal as equities were up and Treasuries gave back a bit of their recent gains. Thursday witnessed continued buying of equities with the Dow up +1.4% heading back towards 13K, the NASDAQ back over 3K and the S&P 500 knocking at the door of 1,400. On Friday, we swung back down as the US equities were off one to one-and-a-half percent, and Europe was off one to almost two-and-a-half percent.

For the week, the 2-year Treasury note yield was down 4bps to 27bps (its low of the week); the 5-year note was down 5bps to 85bps (its low of the week); the 10-year note was down 7bps to 1.98% (its low of the week); and the 30-year bond was down 9bps to 3.13% (having been as low as 3.12%).

Fears flared up again about the viability of the Euro-zone as we currently know it. For the Majors, Spain was the loser this week. The Spanish 10-year was off by an additional 26bps at its worst this week, cracking the 6.00% barrier at 6.02% before dipping to 5.98%. Italy was weaker this week but to a much smaller degree. The 10-year Italian bond was off as much as 28bps, before improving to a loss of just +7bps to end the week at 5.52%. The French 10-year Oat was perceived as an avenue of safety and its yield dropped as low as 2.88%, before selling off a bit to close at 2.95% (down -4bps on the week). Germany continues to be the destination for ultimate safety on the continent as they were the beneficiaries of all-time low yields on their securities. At their low yields this week, the 10-year German Bund fell to 1.639% (almost besting the 1.636% on September 23^rd), the 5-year Bund fell to 61.7bps and the 2-year Bund fell to 9.1bps which was the first time the German 2-year note has ever been lower than the Japanese 2-year note.

The Portuguese 10-year note was off again this week with its yield peaking at 12.80%, before ending the week at 12.56% (a 32bps loss). The Greek 10-year note experienced quite a bit of volatility as its yield magnified the mood swings of the market. At its worst the 10-year peaked at new recent-high of 22.43%, and at its best the yield dropped to 20.98%. The security finished the week at 21.13%, at a gain of 67bps on the week.

The following are just a few additional observations I made during the week, much of which was spent in airplanes and in airports across the United States. The sale of Swiss 6-month bills actually drew a negative yield as investors were willing to lock-in a known-small-guaranteed loss rather than be exposed to the possibility of a greater loss. Natural gas fell to a ten year low of $1.959/mBTU. Natural gas is at its cheapest price since January 2002 and its price is off nearly sixty percent over the past twelve months. It will be interesting to see how the lessening of natural gas prices flows into wholesale and retail electricity prices.

For those of you with a bit of an economic bent, please review the most recent US Beveridge curve. It currently reflects an interesting phenomenon that even as the number of job openings has increased; the unemployment rate hasn’t dropped as fast as it has in the past. Is this a temporary anomaly or has there been a permanent shift in this relationship?

Finally, it was a rather rough week for the Money Market Fund industry as both Fed Chairman Bernanke and Boston Fed President Eric Rosengren continued to take aim at the industry as being too risky and in need of further regulation.

This Week in Corporate Finance (04/06/12)

Welcome to the second quarter! Market participants felt as if they might have been riding on a rollercoaster as the market gyrated in a number of different directions and speeds as it progressed through this holiday-shortened week.

The biggest news of the week was released on Friday, when most European markets and the US equity market were closed for Good Friday. The US Employment report was a mixed bag of information with the positive news being another drop in the unemployment rate, down -0.1% to 8.2% from 8.3%, while the number of jobs created, though positive and significant, was weaker than expected at +120k, versus the consensus number of +205k. This was the twenty-fifth consecutive month of job creation but it was also the first time since November that the number of jobs created was less-than +200k.

Due to the timing quirk of the Employment report being released on Good Friday, the market’s reaction was interesting to say the least. Though the US equity markets were closed, the futures markets were actually open for 45 minutes following the release of the report. Not surprisingly, all the futures markets were down; the Dow was off -120 points; the S&P 500 was down -16.20 points; and the NASDAQ was down -28.50. We will have to wait until the next full trading session on Tuesday to see what the full fallout from the report will be since Easter Monday is a holiday in many places in the world, although a regular workday here in the US

The week had started out on quite a strong note as both the Dow and the S&P hit multi-year highs, at 13,297.11 and 1,422.38, respectively. The NASDAQ had previously hit a multi-year high last week. During the week, we received the minutes from the last FOMC meeting (March 13^th), which hinted that the likelihood of additional stimulus via a QE3 had diminished. Both the equity and Treasury markets responded to the news by selling off. Equity prices continued to fall through the rest of the week, though Treasuries began to rally on concerns that Europe was still not quite out-of-the-woods yet, and money moved towards safety.  

Net-net, worries about both Europe and a weaker US economy were the prevailing sentiments at week’s end. For the week, the US Treasury 2-year note yield was down 2bps to 31bps; the 5-year note was down 14bps to 90bps; the 10-year note was down 16bps to 2.05%; and the 30-year bond was down 12bps to 3.22%.

It was a similar story in Europe, as the market continued to fret about the long-term health of the European economy. All the major sovereigns sold-off this week with the exception of Germany, which continues to be the safe haven of the continent. The Spanish 10-year note sold off by 41bps, raising the yield to 5.76%; the Italian 10-year was 33bps weaker, bringing the yield to 5.45%; the French 10-year Oat was higher by 10bps to 2.99%; and the uber-safe 10-year German Bund was lower by 5bps, driving the yield to a near record-low yield of 1.74%.

The Portuguese 10-year note snapped its recent winning streak, as it sold-off by 71bps to close back above 12 percent at 12.24%, while the Greek 10-year security continued to struggle, shooting through the 22% handle to peak at 22.19%, before falling back to a still-elevated 21.80%.

The European equity market also highlighted the market’s concerns, as all the major indexes ended the week in the red. The FTSE was off -44.78 to finish as 5,723.67; the DAX slipped by -171.57 points, to end at 6,775.26; and the CAC was down -104.00 to settle at 3,319.81.

What the Fed may announce at its next FOMC meeting (it’s a two-day meeting April 24^th & 25^th) is now back in the crosshairs of market observers.

In the US, personal Income Taxes are due Tuesday April 17^th this year, due to the fact that the traditional tax due-date falls on a Sunday and the Emancipation Day holiday falls on Monday the 16^th. Enjoy your two “extra” days of preparing your taxes, or just file form 4868 for your automatic extension to October 15^th, just remember to pay any taxes you owe to avoid incurring any interest and/or penalties.