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.