This Week in Corporate Finance (09/28/12)

Welcome to the end of the third quarter for calendar 2012. I believe we are now entering into what is typically the most interesting quarter of the year. Now that the turn of the new year is approximately 90 days away, investors, issuers, and market participants of all stripes have begun to strategize what position they want to be in at year’s end, as well as, how they want to be positioned for the first quarter of 2013. Some of the elements making this year’s fourth quarter so interesting and exciting include a presidential election, the “Fiscal Cliff”, expiration of the “TAG” program, and a continued interest in the restructuring of Money Market Funds.

This week was a continuation of the “risk-off” trade as money moved out of riskier assets and into US Treasuries. For the week, the US 2-year Treasury note yield was down -3bps to 23bps; the 5-year note was down -5bps to 62bps; the 10-year note was down -12bps to 1.63% (now only up +8bps over the past four weeks); and the 30-year bond was down -12bps to 2.82% (now only up +15bps over the past four weeks). The 2-year/30-year curve flattened by -9bps to stand at +259bps (now only wider by +14bps over the past four weeks).

As we look back at the US Treasury market over the third quarter, net-net, there really wasn’t one big story that drove the entire curve one way or the other, the story is a bit more nuanced.  The 2-year note yield was down -7bps and the 5-year note was down -13bps, reflecting a belief that the shorter-end on the curve is anchored to low interest rates for the foreseeable future (or at least into 2015 – so says the Fed). The 10-year note was down -4bps and the 30-year bond was up actually +6bps, which reflects more of a concern (though still quite small) about inflation in the longer-term. It’s also very fair to say the longer-end of the curve was basically unchanged for the quarter.

One of the bigger stories of the third quarter was the Fed’s announcement that it would be purchasing $40 billion/month of mortgage securities, also known as QE III. As a result of the Fed’s announcement, mortgage rates fell to historical lows. This week, the average 30-year fixed-rate mortgage fell to 3.40% and the average 15-year fixed-rate mortgage fell to 2.73%. Of particular note was the fact that, while the 30-year Treasury note actually rose by +6bps, during the quarter, the 30-year mortgage rate fell by -26bps.

In Europe, as concerns flared-up again about the Euro-zone, money rushed towards safety this week as Germany was again seen as a safe port in the storm. The 30-year Bund yield was down -18bps to 2.25% and the 10-year Bund was down -17bps to 1.43%.  France was also seen as a safe haven as its 10-year Oat yield fell -10bps to 2.18%. In Italy, their 10-year note yield was higher by +5bps at 5.10%

Then there is Spain. Concerns that the economic situation there has taken a turn for the worse was reflected in their 10-year note yield as it spiked back over 6 percent (topping out at 6.11%) before dropping back under at 5.95% (up +19bps for the week).

Portugal was another country of concern this week as its 10-year note yield continued its recent climb. After being as low as 8.03%, two weeks ago, it broke back through the nine percent level (peaking at 9.18%) before closing the week at 9.00% (up +42bps for the week). 

The situation in Greece continues to improve (on a relative basis). Their 10-year bond yield fell another -43bps this week to close at 19.49%. The yield has now fallen -1148bps (from 30.97%) since May 31^st.

With the start of the new quarter, we will be receiving the monthly Employment Report on Friday and the next scheduled FOMC meeting, towards the end of the month on October 23-24^th.