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.