This Week in Corporate Finance (06/22/12)

A little less risk in Europe and a disappointing two-day FOMC meeting caused US Treasury yields to rise a bit this week. The absence of truly awful news out of Europe combined with the Fed announcing only a continuation of Operation Twist (rather than new additional liquidity measures), took a bit of the wind out of the sails of the recent Treasury rally.

The FOMC meeting this week merely confirmed the economic path the United States has been on for quite some time now: a slow (sometimes painfully slow) but steady improvement in the employment situation combined with a positive but subpar expansion of economic activity.

The lack of a new stimulus package certainly trumped fears of more economic malaise as the entire US Treasury curve sold-off and steepened. For the week, the 2-year note was up 2bps to 30bps; the 5-year note was up 8bps to 75bps; the 10-year note was up 10bps to 1.67%; and the 30-year bond was up 8bps to 2.76%. Reflecting last week’s Treasury rally, US mortgage rates fell to a new record low of 3.66% for the average 30-year fixed-rate mortgage.

Europe was certainly interesting if nothing else this week. The week started with all eyes focused on the election in Greece. I, for one, find myself having a hard time getting terribly excited about the election outcome in Greece. Whether a pro-bailout or anti-bailout government is formed, it doesn’t change the simple calculus that Greece owes far more to its creditors than it will ever be able to pay back, and at some point Europe (i.e. Germany) is just going to have to cut a check. Now the terms of the debt write-off will be interesting to study whenever it comes to pass. The Greek 10-year note yield bounced around a little bit this week but finished the week relatively unchanged at 27.21% up +8bps.

Spain was definitely in the crosshairs this week as its 10-year note yield flirted with the precarious seven-percent level. The 10-year yield soared as high as 7.285% (a new record-high) before ending the week at 6.38%, an improvement of -49bps on a week-to-week comparison. The belief that there will be additional support provided for “virtuous” troubled sovereigns was a factor for this improvement in Spain’s funding costs.

Italy spent most of the week dancing around the six-percent level as its 10-year note yield finished the week at 5.80%, an improvement of -13bps during the week. Portugal’s cost-of-funds also improved this week, as its 10-year note yield dropped -103bps to 9.49% from 10.52%. This was the first time in over a year that the yield on the Portuguese 10-year note was less than ten percent.

We witnessed a fair bit of money move from the relative safety of the German Bund market this week. The 2-year Bund was off +7bps to 14bps, the 10-year Bund was weaker by +14bps to 1.58%, and the 30-year bund was softer by +16bps to 2.25%. The French 10-year Oat fluctuated a bit during the week, but settled the week at 2.60%, practically unchanged at +1bp.

The US equity markets were a bit volatile this week but finished the week between +/- one percent. The Dow was down -126.39 to 12,640.78 (-1.0%). For all the gloom and doom about US equity markets, the Dow has been no lower than 12K since December 21^st. The NASDAQ was +19.62 to 2,892.42 (+0.7%) and the S&P 500 was down -7.82 to 1,335.02 (-0.6%).

It was a similar story in Europe. The FTSE was up +25.17 to 5,513.69 (+0.5%); the CAC was up +9.44 to 3,090.90 (+0.3%); and the DAX was up +45.12 to 6,263.35 (+0.7%). The Nikkei had another winning week, being up 229.03 to 8.798.35 (+2.7%).

The price of oil fell rather substantially this week, dropping -$3.83/b to close the week at $80.19/b. Intraweek, the price of oil fell to a 52-week low of $77.56/b, as well as, the lowest price since September 2009.

The US dollar corporate bond market continues to be active. This week Occidental Petroleum lead the pack with their $1.75 billion two-tranche transaction comprised of $500 million of a 5-year note and $1.25 billion of a 10-year note. BT Group was also in the market with their own two-part transaction. Their $1.25 billion deal consisted of $500 million of an 18-month FRN and $750 million of a 2-year note.

This coming week we will be closing the books on the first half of 2012, and looking forward to the latest glance of the US employment situation on Friday July 6^th, after we celebrate this country’s independence from our friends on the other side of the pond.

This Week in Corporate Finance (06/15/12)

Why oh why, does the market rally on news of a bailout? The early indication from late Sunday night/early Monday morning was that market loved the news of the “Spailout”. As Monday progressed the market sobered up to the realization that an injection of 100 billion euro ($125 billion) into the Spanish banking system was not a “good thing”.

The net result of the “good news” of the Spailout was an increase in the funding cost for Spain as their 10-year note yield reached an all-time high of 6.998%. Whether one wishes to refer to the passing of the 7% level as a “Crossing the Rubicon” moment, or Model B9 warning “Danger, Danger Will Robinson”, history has taught us that “good things” do not follow a sovereign breaking this threshold.

The next European nation we are now concerned about is Italy. For the week, the Italian 10-year note yield was up +23bps to 5.998% after touching an intra-week high of 6.34%. Italy did cross the 7% level back in January before falling to as low as 4.68% back in March. The yield has been on a steady march higher since falling to that 2012 low.

Greece was pretty much a non-event this week as their 10-year note actually rallied by -176bps to fall to 27.17%, its lowest yield since May 15^th. Portugal also rallied this week as its 10-year note fell by -53bps to 10.54%, its lowest level since early May. The French 10-year note ended the week relatively unchanged at +7bps to 2.58%, while the German 10-year Bund did sell-off a bit, up +12bps to 1.45%.

Here in the US, it was a bit of a risk-off week, as concerns about Europe and the US economy kept many investors either on the sidelines or adding safety rather than yield. For the week, the 2-year note was up 1bp to 28bps; the 5-year note was down 4bps to 67bps; the 10-year note was down 7bps to 1.57%; and the 30-year bond was down 7bps to 2.68%.

In the US, the equity markets ended the week on a positive note. The Dow was up +212.97 to 12,767.17 (+1.7%), the NASDAQ was basically unchanged at up +14.38 to 2,872.80 (+0.01%) and the S&P 500 was up +17.18 to 1,342.84 (+1.3%).  Stocks in Europe did a little better as they were up by at least 1%. The FTSE was up +53.44 to 5,488.52 (+1.0%), the CAC was up +29.77 to 3,081.46 (+1.0%), and the DAX was up +87.31 to 6,218.13 (+1.4%). It was a similar story in Japan, as the Nikkei was up +110.06 to 8,569.32 (+1.3).

Oil finished the week relatively unchanged at $84.02/b, down -$0.30, though the intra-week low was $81.07/b. It was a very quiet week for the euro as it traded in a range of $1.244 to $1.267.

The US corporate bond market continues to be active as investors continue to have interest even at these very historically-low yields. Two-part deals were the preferred structure this week, as AT&T issued $2 billon in a two-tranche transaction comprised of $1.15 billion of a 5-year note and $850 million of a 10-year note; Symantec raised $1 billion through the issuance of $600 million of a 5-year note and $400 million of a 10-year note; and CBS raised $900 million with $400 million of a 5-year note and $500 million of a 30-year bond.

The election in Greece this weekend, the two-day FOMC meeting starting on Tuesday and the approaching quarter-end, will give us plenty to watch in the near future.

This Week in Corporate Finance (06/08/12)

This was a week where the markets collectively looked back on the events and activity of the previous week and said, “Maybe that was a bit too much”. Equity markets were up and fixed-income markets were down, as investors were willing to add some risk to their portfolios. The big news at the end of the week was Spain’s formal request for 100 billion euros ($125 billion). Spain joins Greece, Ireland and Portugal in the group of European nations requiring a bailout.

For the week, the 2-year US Treasury note’s yield was up 2bps to 27bps; the 5-year note was up 9bps to 71bps (still 5bps lower than two weeks ago); the 10-year note was up 18bps to 1.64% (still 10bps lower than two weeks ago); and the 30-year bond was up 23bps to 2.75% (still 9bps lower than two weeks ago). As a reflection of last week’s ultra-low yields, US mortgage rates reached all-time lows, falling to 3.67% for a 30-year fixed-rate and 2.94% for a 15-year fixed-rate mortgage.

In Europe, it was a move from safety to yield. In Spain, the 10-year note rallied -31bps to drop to 6.22%; in Italy, the 10-year note weakened slightly by a modest +3bps to 5.77%; in Portugal, the 10-year note was -90bps lower to 11.07%; and even Greece got in on the act, with their 10-year note rallying by a substantial -161bps, lowering its yield to 28.93%.

Money moved out of the safety of France and Germany. The 10-year French Oat was off +25bps to yield 2.51%, while the 10-year German Bund sold-off by +16bps to 1.33%.

As money moved away from safety into higher yielding assets, the equity markets benefited, up at least +3.5%. The Dow was up +435.63 to 12,554.20 (+3.6%); the NASDAQ was up +110.94 to 2.858.42 (+4.0%); and the S&P 500 was up +47.62, crossing back over the 1,300 level at 1,325.66 (+3.7%). Facebook fell to a new low of $25.52 this week before ending the week at $27.10.

Stocks in Europe were also up. The FTSE was higher by +174.89 to 5,435.08 (+3.3%); the CAC was up +101.22, back over the 3K level to 3051.69 (+3.4%); and the DAX was up +80.53 to 6,130.82 (+1.3%). In Japan, the Nikkei was basically unchanged at +19.01 to 8,459.26 (+0.2%).

Oil snapped its five week losing streak, ending the week up +$1.11/b to $84.32/b (+1.11), after touching an intra-week low of $82.45/b.

Major global economic players continue to counteract slowing economies by lowering interest rates. China lowered their interest rates for the first time since 2008, lowering their one-year lending rate by -25bps to 6.31% from 6.56%. In Australia, the RBA lowered interest rates for the fourth time this cycle, this time by -25bps to 3.50% from 3.75%. The ECB left their key rate unchanged at 1.00%.

With all the volatility in the markets, corporate bond issuance fell to its lowest level of 2012. Even so, a number of marquee deals were still priced this week including Deere’s $2.25 billion two-tranche deal comprised of $1 billion of a 10-year note and $1.25 billion of a 30-year bond. Tyson raised $1 billion through the issuance of a 10-year note, while Sysco brought a two-part $750 million transaction made up of $300 million of a 3-year note and $450 million of a 10-year note.

The Commercial Paper (CP) market shrank for the first time in six weeks. The total amount of CP outstanding contracted by $14.7 billion from $1.029 trillion to $1.014 trillion.

Both the quarter-end and the next two-day FOMC meeting (June 19 -20^th) continue to lurk on the horizon.

This Week in Corporate Finance (06/01/12)

This was an extraordinary week, as the market pretty much gave up the ghost as far as the European crisis and the world’s economy is concerned. Fear trumped hope as markets across the spectrum capitulated. Be it equities, commodities or anything other than the safest of the “safe” sovereigns, it was definitely a “risk-off” week.

We are facing an ongoing and perhaps accelerating European crisis, a slowdown in the economies of the BRICs, and a United States where the latest economic reports indicate only a slowing growing economy (+1.9% in the first quarter) and a jobs markets, while positive (+69k jobs) with an 8.2% unemployment rate in May is nowhere near the +350k jobs a month needed to really move the needle towards full employment.

Before we dive into the numbers, keep in mind that we have now moved into “uncharted waters” as the Fed’s Treasury data only goes back to the end of the Truman/beginning of the Eisenhower administration, circa 1953.

For the week, the 2-year US Treasury note yield was down 4bps to 25bps; the 5-year note was down 14bps to 62bps (its new all-time low is now 60bps); the 7-year note touched an all-time low yield of 92bps; the 10-year note was down 28bps to 1.46% (its new all-time low is now 1.4387%); and the 30-year bond was down 32bps to 2.52% (its new all-time low is now 2.5089%, beating the previous record low yield of 2.5090% reached on December 18, 2008).

US mortgage rates also touched record lows and that was before the release of the disappointing jobs report. The average rate for a 30-year fixed-rate mortgage fell to 3.75% and the 15-year fixed-rate dropped through three percent to 2.97%.

In Europe, Spanish bonds sold-off as the 10-year note reached a peak yield of 6.70% (perilously close to the hazardous 7% level and not far from its recent 12-month high of 6.729%) before rallying a bit to finish down only +22bps at 6.53%; in Italy, the 10-year note crossed into 6% territory before settling at 5.74%, off only +7bps for the week, and in France, the 10-year Oat’s yield plunged towards the 1% handle, falling as low as 2.07% (a record low yield) before giving up a bit of its gains to finish the week at 2.26%, still lower by -26bps this week.

Germany continues to be the safe harbor in Europe. The German 30-year Bund fell -30bps this week to 1.67% (after touching an all-time low yield of 1.63%), the 10-year Bund dropped by -20bps to settle at 1.17% (after reaching an all-time low yield of 1.127%, and just when you thought the yield on the 2-year Bund couldn’t get any lower, it actually set a new record low yield of -1.2bps (yes negative, as in, if you give me a dollar today , I’ll give you 99 cents back in two years) before closing the week at +1bp.

In Portugal the yield on the 10-year note improved this week to finish back under twelve percent at 11.97%, a drop of -27bps. The Greek 10-year did sell-off a bit to end the week at 30.54%, but that was actually off it week’s high of 30.97%.

Not surprisingly, the equities markets were weaker this week as return of capital was more important than return on capital. Here in the US, all the major indexes were lower by about three percent; the Dow was off by -336.26 to 12,118.57 (-2.7%), the NASDAQ was weaker by -90.05 to 2,747.48 (-3.2%) and the S&P 500 was softer by -39.78 to fall through the 1,300 level to 1,278.04 (-3.0%). Facebook continues to grind lower and lower, this week touching a new low price of $26.83 or -29% since its IPO.

It was a similar story outside the US, as the FTSE was lower by -91.34 to 5260.19 (-1.7%); the CAC faded by -97.47 to fall through the 3K level to close at 2,950.47 (-3.2%), and DAX dropped -289.65 to 6,050.29 (-4.6%); and the Nikkei fell by -171.06 to 8,440.25 (-2.0%).

Oil prices dropped for a fifth consecutive week, falling by -$8.27 to $83.21/b (-9.0%), not far from it low of the week of $82.56/b and also not far from its 52-week low of $77.05 reached back on October 4^th. 

The Euro touched a twenty-two month low versus the US dollar at $1.2316. While it’s off quite a bit from its recent high of $1.488 back in April 2011 and certainly from its all-time high of $1.602 back in April 2008 (ouch - I remember, I was in Paris at the time), it is still north of its introductory level of $1.19 and its all-time low of $0.88.

Events in Brazil and India, as well as China continue to point to a slowing world economy. Brazil lowered it Selic rate by 50bps from 9.00% to a record low yield of 8.50% and India reported its slowest economic growth rate in nine years.

On the debt issuance front, Eastman Chemical came to market with a $2.4 billion three-tranche transaction. The deal was comprised of $1 billion of a 5-year note, $900 million of a 10-year note and $500 million of a 30-year bond.

With all of the developments of the past week, it will be interesting to watch and see how and if the Fed reacts at their upcoming two-day FOMC meeting on June 19 – 20^th.