This Week in Corporate Finance (07/27/12)

We survived yet another week where it seemed at times we were on the cusp of tumbling over the edge into an abyss. Monday through Wednesday had a bit of an “End of Times” feel to it as the world watched to see if Europe had actually given-up-the-ghost. The stronger nations of the world watched their interest rates plummet to historical lows, while the weaker nations witnessed their yields soar into the stratosphere. On Thursday, President of the ECB, Mario Draghi, soothed the market’s skittish nerves with words of encouragement that Europe did indeed possess the intestinal fortitude to save itself. Interest rates reversed course and with the additional news of the US economy growing a little stronger in the second quarter than expected, the market rode into the weekend with a much more positive tone than where it closed on Wednesday evening. The big question on everyone’s mind is whether this is just another of the many head fakes we have suffered through over the past 4-plus years, or are we really on the path to sustainable economic growth and stability?

For the week, the US Treasury 2-year note was up 4bps to 24bps (after dropping to 19.95bps, its lowest level since September 20^th ); the 5-year note was up 8bps to 65bps (after falling to a new record low of 53.94bps); the 10-year note was up 9bps to 1.55% (after falling to a new record low of 1.3790%); and the 30-year bond was up 9bps to 2.63% (after falling to a new record low of 2.4405%). The average rate on a 30-year fixed-rate mortgage also fell to a new record low of 3.49%, more than 100bps lower than where we were a year ago (4.55%).

It was a similar story in Germany; the 30-year Bund fell to as low as 2.02% before ending the week at 2.27% (+21bps), the 10-year Bund tied its all-time low of 1.127% before finishing the week at 1.40% (+23bps), and the 2-year Bund dropped to its all-time low yield of negative -8bps before closing the week at negative -3bps (+4bps).

Spanish yields did an excellent job of encapsulating the rollercoaster ride we experienced this week. At its nadir, the Spanish 10-year note yield rocketed to an all-time high of 7.751% and seemed to be heading towards eight percent, but with the change of market sentiment, the yield settled the week at 6.74% (-53bps, week-on-week). This was the fourth time the 10-year eclipsed the seven percent handle, only to drop back through it.

The Italian 10-year note yield rose as high as 6.706% (its highest level since mid-January) before retreating back through the six handle to close the week at 5.96% (-64bps week-on-week).

The Euro this week dropped as low as $1.2043, which is less than its lifetime average of $1.2087, and the lowest level since $1.1877 in June 2010. One would then have to go back to 2006 to find the Euro as weak against the US dollar. Like most other markets, the Euro found strength in the later part of the week and finished at $1.2303.

With yields at or close to historical lows, a number of corporate issuers took advantage of the situation and raised a fair bit of debt at very attractive levels. FedEx raised $1 billion in a two-tranche transaction comprised of $500 million of a 10-year note and $500 million of a 30-year bond. This was the first time FedEx issued in the 30-year tenor since 1989 (think “Every Rose has Its Thorn” by Poison). IBM also came to the market this week with $1 billion 10-year note. The coupon on the note was 1.875% which makes it the lowest coupon ever for a US dollar corporate bond in the ten-year sector.

The Dow crossed the 13K mark this week for the first time since May and finished the week at 13,075.66, while the NASDAQ made a run at 3K closing at 2958.09.

The market will be keenly awaiting any news coming from the Fed as it concludes its regularly scheduled FOMC meeting on Wednesday as well as anything the Employment Report may hold in store for us when it is released on Friday. The expectation is for Payrolls to increase by +100K and for the Unemployment Rate to remain unchanged at 8.2%.

On a side note, there is a new book out on the financial crisis, “The Lost Bank: The Story of Washington Mutual” by Kirsten Grind, it should be an interesting read.

This Week in Corporate Finance (07/20/12)

This was just another uneventful week where we didn’t receive any fresh or earth-shattering news, but instead just seemed to be weighed-down by an economic environment that seems to leave us just stuck in the mud. We’re moving forward, but every step requires herculean effort and results in us moving at an elephantine pace. Investors continue to vote with their dollars, Euros, yen, sterling, etc., and their preference this week was for safety.

US Treasuries continue to be a recipient of money moving away from risk. For the week, the 2-year note was down 5bps to 20bps (dropping to 20.15bps, its lowest level since September 20^th ); the 5-year note was down 5bps to 57bps (falling to a new record low of 56.84bps); the 10-year note was down 1bp to 1.46% (after falling as low as 1.4403%, nearly breaking the record low of 1.4387% reached on June 1^st); and the 30-year bond was down 2bps to 2.54% (after being as low as 2.52%, not far from its all-time low yield reached on June 1^st of 2.5089%).

Germany and a number of other “core” sovereigns continue to be the beneficiaries of the “risk-off” trade. The 30-year Bund was down -7bps this week to 2.06%; the 10-year Bund continues to head back towards record-low yields, the security dropped -9bps this week to 1.17%, not far from its all-time low yield of 1.127% reached back on June 1^st and the 2-year Bund continues to thrive in Peter Pan’s “Never Never Land” as its yield remained under 0% and actually fell another -3bps this week to settle at -7.4bps.

The French 10-year Oat fell -16bps to close the week at a new record low yield of 2.07%. It’s hard to remember the 10-year Oat soared as high as 3.82% back in November. The Belgian 10-year fell -22bps to 2.47%, a new all-time low yield, after it had also spiked in November to 5.91%. France and Belgium as well as a number of other “core” sovereigns have witnessed a fair amount of money flow to them as the yields in Germany continue to plunge. With a bit of a yield pick-up and not a lot incremental risk, this trade has been very popular over the past two weeks.

Then we have Spain. The trend-line for Spain has been one-dimensional since March. Starting at 4.832% on Thursday March 1^st, the Spanish 10-year is up +242bps to a near-record high of 7.284%. With this week’s surge of +60bps, the Spanish 10-year note has now crossed the “Rubicon” of seven percent four times since June 18^th, and while it dropped back in the sixes the three prior times, it remains to be seen whether that will happen again or will Spain’s cost of funds continue to rise?

Italy continues its ongoing “Danza Macabra” as its 10-year note flirts with the six percent level. For the week, the yield was up +11bps to 6.17%. After being as high as seven percent as recently as January, Italy continues to battle for its economic well being.

The Euro fell to a fresh 25-month low this week dropping to $1.2144, the lowest level since June 2010.

The LIBOR scandal continues to generate headlines both here in the US as well as around the world. You know it must be something big when the story moves from the financial trades to the mainstream media. (It’s never a good sign when Joe K. and the gang are talking about “The LIBOR” in the morning on CNBC).  But to truly witness how widespread the story has become, check out this link to “The Daily Show with John Stewart” and gauge for yourself.

http://www.thedailyshow.com/watch/wed-july-18-2012/international-banking-actuality-part-37---libor-fallout

Happy Two Year birthday to Dodd-Frank, you’re growing up so fast.

This Week in Corporate Finance (07/12/12)

The narrative for this week was not much changed from last week; weak economic growth had investors seeking safety rather than risk. We witnessed some near-record low yields in the US, and some all-time low yields in other parts of the world. Unless we receive some type of news that is dramatically different from what we have been recently experiencing, we should expect to stay in this uber-low yield environment for the foreseeable future.

Here in the US, for the week the 2-year note was down 2bps to 25bps; the 5-year note was down 2bps to 62bps; the 10-year note was down 8bps to 1.47% (not far from its all-time low yield of 1.4387% reached on June 1^st); and the 30-year bond was down 10bps to 2.56% (also not far from its all-time low yield reached on June 1^st of 2.5089%). It is also interesting to note that the “term premium” (a model the Fed uses to incorporate expectations for interest rates, growth and inflation) shows US Treasuries at their most expensive level ever, at negative -96.17bps.

The cost of home mortgages in the US dropped to their lowest levels since at least 1971 (think “American Pie” by Don McLean). The average rate for a 30-year fixed rate mortgage fell to 3.56% and the average rate on a 15-year fixed mortgage fell to 2.86%.

In Germany, the 30-year Bund was down -5bps to 2.13%, the 10-year Bund was down -8bps to 1.25% (not far from its all-time low yield of 1.17% reached on June 1^st), and the 2-year Bund fell -3bps to yield an almost unbelievable negative -4.2bps.In France, the 10-year Oat fell -14bps to 2.24%, while the 5-year Oat also fell -14bps to a new all-time low yield of 88.8bps. In Belgium, their 10-year note fell -15bps to an all-time low yield of 2.644%.

In Spain, after crossing back over the seven percent handle earlier in the week, their 10-year note dropped -31bps to close at 6.64%, while the Italian 10-year note fell by -12bps to back under six percent at 5.91%.

It was another quiet week in Greece as their 10-year note continued to slowly improve, this week by -34bps to 25.33%, its lowest level since mid-May. In Portugal, the recent deterioration of their credit continues as their 10-year note yield rose +37bps to 10.58%.

The Euro fell to a fresh 25-month low this week dropping to $1.2167, the lowest level since June 30, 2010.

Brazil lowered their Selic rate for the eighth time since the fall of last year. This week’s move was -50bps, bringing the benchmark rate down to an all-time low yield of 8.00%.  The Bank of Korea also lowered interest rates this week. It was the first ease for South Korea since February 2009. South Korea started increasing interest rates in July of 2010, and tightened fives through July of 2011. The -25bps easing this week lowered the seven-day repo rate to 3.00%.

All eyes will continue to be focused on the upcoming FOMC meeting at the end of the month to see if the Fed will introduce any new economic stimulus to the US economy.

This Week in Corporate Finance (07/06/12)

Seeing the job report released on Friday, made me think of the old Chevy Chase opening to “Weekend Update” on Saturday Night Live, “Our top story tonight: Generalissimo Francisco Franco is still dead”. Even with all the news of the past three weeks, we are basically in the same place we were on June 15^th.

The major news of the week here in the US, was the Employment report which reconfirmed our ongoing scenario of positive but weak employment growth, with positive but lackluster economic growth. The US economy added a subpar +80K jobs in June with the Unemployment Rate holding steady at 8.2%. On the bright side, this was the twenty-eighth consecutive month of job creation. The quandary is that this rate of job creation does not equate to anything other than running-in-place. We need to see job creation around +300K/month to truly start driving down the unemployment rate, while at the same time boosting our GDP back up into the +3% neighborhood. Unfortunately, there is nothing on the foreseeable horizon that would cause one to believe that is about to occur.

From two weeks ago, US Treasuries have rallied.  The 2-year note is down 3bps to 27bps; the 5-year note is down 11bps to 64bps; the 10-year note is down 12bps to 1.55%; and the 30-year bond is down 10bps to 2.66%. As stated earlier, this is almost exactly the same shaped yield curve we had on Friday June 15^th.

It’s also been quite an interesting two weeks in the ROW (Rest-of-the-World). Last Friday, with the Spanish 10-year note flirting around seven percent and the Italian 10-year dancing north of 6.25%, European Union leaders announced a framework for additional support for the weaker nations of the EU. The market reacted with a massive hopium-induced rally. Stock markets soared and bond yields fell. Unfortunately, with the benefit of a little time and a bit of sobriety, the market realized that reality hadn’t noticeably changed at all, and the outlook for Europe continues to look rather bleak.

Since June 18^th, the Spanish 10-year note has traded in a range of 6.15% (post-announcement low) to 7.285% (an all-time high) and traded as high as 7.036% on Friday. Anything higher than seven percent is considered in the “danger zone” (I always hear Kenny Logins whenever anyone mentions that term). The Italian 10-year note has floated in a range of 5.59% to 6.34%, finishing the week at 6.03%.

Germany continues to be a harbor for safety. This week, the 30-year Bund yield dropped -15bps to 2.18%, the 10-year Bund fell -15bps to 1.33% and the 2-year Bund made history this week with its yield actually going negative and trading as low as -1.8bps. It is just incredible (and a little scary) that investors are willing to lock-in a guaranteed loss in order to protect themselves from an even greater potential loss. France is also seen as a rather safe place to park money. Their 10-year note improved by -31bps, to close the week at 2.38%.

Quietly, Greece and Portugal have continued to improve slowly, or at least not get materially worse. The Greek 10-year note fell -16bps this week to 25.67%; this is its lowest level since mid-May. The Portuguese 10-year note yield was actually up +5bps this week to 10.21%, but given that it was as high as 18.29% back in late January, a ten-handle looks rather benign.

The other big news this week was Central Bankers lowering interest rates. In China, the People’s Bank of China announced its second interest rate reduction in a month, lowering their benchmark rate by -31bps to 6.00%, its lowest level since February 2011. China had started a tightening cycle back in October of 2010 which ended last month.

The European Central Bank (ECB) also lowered interest rates this week. The ECB lowered its benchmark rate by -25bps to an all-time low of 75bps. Even during the height of the financial crisis back in early 2009, the ECB didn’t go lower than 1.00%. It’s amazing to remember that the ECB actually RAISED interest rates twice last year to 1.50% before quickly unwinding them by year’s end.

With the recent ECB easing, the Euro is currently trading at twenty-five month low of $1.2266. The five-year low for the Euro is $1.19 reached back in June 2010.

This week, the Commercial Paper (CP) market suffered its biggest contraction since the week of December 1, 2010, shrinking by -$35.7 billion to $972.5 billion outstanding. The CP market had been growing since the start of the year until stalling out in late-May. After rising to $1.029 trillion outstanding in the week of May 30^th (the highest level since September 2011), the market has struggled to stay north of $1 trillion.

Oil continues to be a bit volatile. Since April 23^rd, oil has traded between $105.68/b and a thirty-four month low of $78.28/b reached on June 28^th. It has since bounced up from there and is currently trading at $84.24/b.

In addition to everything else that is going on, the LIBOR scandal continues to unfold on both sides of the Atlantic and we continue to wait-and-see if there will be any new changes to the way the SEC regulates the $2.5 trillion Money-Market Funds market.

On the near horizon, the market will continue to try to interpret the economic tea-leaves to divine what, if anything, the Fed may announce at their upcoming two-day FOMC meeting on July 31^st and August 1^st.

Stay tuned.