This Week in Corporate Finance (05/25/12)

For all the gloom and doom surrounding this week, on the whole, it really wasn’t all that bad. We were definitely in a risk-lite mode, but we didn’t witness crashing markets or end-of-times pronouncements. The Euro fell to a 22-month low of $1.2512, as the focus continues to be on Greece’s status within the monetary union of the Euro, and any consequences that might arise if Greece were to exit. There was much talk of the “Grexit”, the “G-euro” and Euro-bonds this week, but as we enter the Memorial Day holiday in the US and month-end, we seem to be holding-up fairly well.

It wasn’t surprising that Greek yields were higher this week. While the 10-year note did grind higher by about 100bps to cross the 30% threshold to 30.216% (the recent high yield), the selling was very orderly.

In the rest of Europe, there was a bit more of a flight-to-safety, but nothing outrageous. In Spain, the 10-year note yield was off a bit at +5bps to 6.31%; in Italy the 10-year note dropped by -15bps to 5.67%; and in France the 10-year Oat fell to an all-time record low yield of 2.422% before bouncing back up to 2.52%.

In Portugal it was a relatively quiet week as yields seem to have plateaued. The 10-year note was basically unchanged at 12.24% after rising +180 bps since its recent low of 10.44% on April 27^th.

Germany continues to the uber-bastion of safety. There were new record low yields across the German yield-curve. The 30-year Bund fell by as much as -19bps to bust through the 2% barrier and touch 1.90% before backing up to 1.97%, the 10-year Bund fell by -6bps to 1.366%, the 5-year Bund dropped by as much as -7bps to 42.2bps before closing the week at 45bps, and the 2-year Bund was as low as 3.1bps before settling at 4.7bps. Germany auctioned 5 billion euro of 2-year Bunds this week with a coupon of 0.000%! With rates getting so low in Germany, some of the other “safer” sovereigns are benefiting as investors are willing to trade a little risk for a little yield.

For the week, the 2-year US Treasury note yield was unchanged at 29bps; the 5-year note was up 1bp to 76bps (the low of the week was 73bps); the 10-year note was up 2bps to 1.74% (the low of the week was 1.71%); and the 30-year bond was up 3bps to 2.84% (the low of the week was 2.78%).

The US equity markets bounced back a bit after last week’s sell-off. The major indexes were up roughly 1-2%. The Dow was up +85.45 to 12,454.83 (+0.7%), the NASDAQ was up +58.74 to 2,833.65 (+2.1) and the S&P 500 was up +22.60 to cross back over the 1,300 benchmark at 1,317.82 (+1.7%). It was a similar story in Europe, as most indexes were also up approximately 1-2%. The FTSE was up +83.91 to 5,351.53 (+1.6%), the CAC was up +39.94 to 3,047.94 (+1.3%) and the DAX was up +68.72 to 6,339.94 (+1.1%).

Oil prices dropped for a fourth consecutive week, dropping by -$0.69 to $90.79/b after being as low as $89.28/b (the lowest level since October) mostly on supply issues. US oil stockpiles continue to grow, currently standing at a 22-year high (think Madonna’s Vogue) of 382.5 million barrels.   

The US corporate debt market continues to buzz with new issuance activity. Far and away the biggest deal of the week was United Tech’s six-tranche $9.8 billion transaction. It was comprised of $1 billion of an 18-month FRN, $500 million of a 36-month FRN, $1 billion of a 3-year bullet, $1.5 billion of a 5-year bullet, $2.3 billion of a 10-year bullet, and $3.5 billion of a 30-year bullet. It was the largest corporate bond transaction since March 2009 when Pfizer issued $13.5 billion in a 5-part security.

BlackRock and Caterpillar each came to the market with $1.5 billion transactions, while Covidien issued $1.25 billion and McDonalds raised $900 million.

The Commercial Paper (CP) market crossed the $1 trillion outstanding level for the first time since last September. The amount of CP outstanding grew by +$14.9 billion to $1.009 trillion. As a point of reference, the total CP market peaked at $2.223 trillion back in August 2007, prior to the start of the financial crisis.

We have a compressed and busy week coming up. US markets are closed on Monday in observation of the Memorial Day holiday and we have the always-important Employment Report to be released on Friday June 1^st.

To those readers in the US, I wish you a very baseball, hot dog, and beer-filled long holiday weekend, as we remember and honor those that have made the ultimate sacrifice for our country.