This Week in Corporate Finance (10/26/12)

Again, we experienced another week where we spent most of our time dancing about on the point of precarious balance. Is the economy ok, or is it growing too slowly? Are third-quarter earnings so weak that they foreshadow a stalling economy or is the economy on the brink of an expansion? The market wants clear and definitive answers to these questions, but what lurks on the horizon is murky at best. The FOMC met and we received our first report on third-quarter GDP, but neither event caused us to move away from our slightly positive, but weaker-than-average recovery scenario.

For the week, the US 2-year Treasury note yield was up +1bp to 30bps (after being as high as 31bps); the 5-year note was up +1bp to 76bps (after being as high as 83bps); the 10-year note was down -3bps to 1.74% (after being as high as 1.85%); and the 30-year bond was down -4bps to 2.90% (after being as high as 3.00%).

The week was a moderately more volatile than the final marks for the week would indicate. We encountered quite a sell-off in the equity markets on Tuesday, with the Dow off -1.8%; crude oil fell to its lowest level since early July, touching $84.94/barrel; and gold fell through the $1,700 floor, dropping to as low as $1,698.70/oz.

In Europe, the short-end of the yield curve out-performed the back-end as the German 2-year Bund yield fell -6bps to 5bps; the 10-year Bund was -5bps lower to close the week at 1.54%, and the 30-year Bund was unchanged at 2.41%.  The French 10-year Oat was slightly weaker this week, rising +4bps to 2.25%.

Euro-zone fears contributed to a bit of a sell-off in the weaker sovereigns. In Italy, their 10-year note yield was off +13bps to 4.90%, while the Spanish 10-year note popped +22bps to 5.59%. It was reported this week that the Spanish unemployment rate hit a new all-time high of 25.02%.

The Portuguese 10-year note was weaker by +52bps, to close back over eight percent, at 8.08%, and while it was a setback, their 10-year note had fallen to a nineteen-month low of 7.56% last week. Similar to Portugal, Greece ended its recent winning streak, as its 10-year note backed-up +84bps this week, to settle back over seventeen percent, at 17.29%.

Corporate bond issuance wasn’t quite as busy this week, though a number of marquee transactions did come to market. Plains Exploration issued $3 billion in a two-tranche deal comprised of $1.5 billion each of an eight-year and a ten-year note. Reynolds American raised $2.55 billion with a three-part offering, consisting of $450 million of a three-year note, $1.1 billion of a ten-year note and $1 billion of a thirty-year bond. This was the first bond deal for Reynolds in over five years.

Chile issued debt this week at the lowest cost ever for a Latin American country. The $1.5 billion transaction was made-up of a 10-year note with a yield of 2.38% and a 30-year bond with a yield of 3.70%. This was Chile’s first US$ offering in over a year. Chile is rated Aa3 by Moody’s, the highest credit rating in Latin America.

Bolivia made news this week as it issued its first international bond since the 1920’s. They raised $500 million with a 10-year note yielding 4.875%. Bolivia is rated BB- by S&P.

For the eighth consecutive week, the Commercial Paper (CP) market contracted. Last week, the CP market shrank by -$19.2 billion to $924.4 billion, outstanding. The CP market hasn’t been this small since January 2011.

Everyone will be waiting for Friday’s Employment Report for the month of October. This will be the last employment update we receive before the U.S. Presidential election on Tuesday November 6^th.

Here on the East coast of the United States, we are bracing ourselves for the Frankenstorm, as we might be attacked by the worst storm in the past 100 years.

Let’s all be safe and smart out there!

This Week in Corporate Finance (10/19/12)

 This was another week where we just sort of moved from one end of the trading spectrum to the other, lacking any true conviction. The last two weeks have had a bit of a “Goldilocks and the Three Bears” feel to them. Last week we saw a push into US Treasuries, as investors were concerned that economic growth was “too slow”, and this week we saw a move out of US Treasuries as growth was viewed as “too fast” (not really but it makes better copy). Maybe next week the market will view the economy as “just right”.

As stated above, this was a “risk-on” week, at least until Friday. For the week, the US 2-year Treasury note yield was up +3bps to 29bps; the 5-year note was up +9bps to 75bps (after being as high as 77bps); the 10-year note was up +10bps to 1.77% (after being as high as 1.84% as late as Thursday); and the 30-year bond was up +8bps to 2.94% (after being as high as 2.98% and knocking at the door of 3.00%).

Yields in Germany acted in a similar manner to yields in the US, as more investors were willing to sacrifice safety for a bit more yield. The 30-year Bund was off +13bps to end the week at 2.41%; the 10-year Bund was off by +14bps to close at 1.59%; and the 2-year Bund was off +7bps to finish the week at 11bps. It was a rather muted week in France, as the 10-year Oat sold-off slightly to settle at 2.21%, up +6bps.

The Italian 10-year note rallied quite nicely, as it was one of the destinations where money was moving. For the week, the note’s yield dropped -21bps to 4.77%, its lowest level since June 2011. Similar to Italy, Spain saw quite an improvement in their cost-of-funds. Their 10-year note yield fell -26bps to 5.37%, its lowest level since April.

Portugal maintained its recent winning streak, with its 10-year note falling solidly through the eight percent level, to finish the week at 7.56%, down -47bps. The yield hasn’t been this low since March 2011. The story in Greece continues to be one of improvement, as their 10-year note continued its grind lower. For the week, the note finished -160bps lower, to close at 16.45%. One would have to go back to July 2011 to find the yield as low.

The corporate bond market came roaring back to life this week with a number of blockbuster deals. I’m old enough to remember when a $1 billion deal was almost considered too big to execute. This week we witnessed Oracle return to the market, after a two year hiatus, with a two-part $5 billion transaction comprised of $2.5 billion each of a five and a ten-year note. Xstrata came to market with a four-tranche $4.5 billion package consisting of $1.25 billion of a 3-year note, $1.75 billion of a 5-year note, $1 billion of a 10-year note and $500 million of a 30-year bond. Other marquee deals of the week included JPMorgan’s $2.85 billion, UnitedHealth’s $2.5 billion and HCA’s $2.5 billion. Companies have sold over $3 trillion of bonds so far this year, second only to 2009’s issuance. The cost of investment-grade debt fell to an all-time low of 2.676% this week. Another indicator of how bullish the market is on credit product, the two-year swap spread tightened to 8bps this week, a historical low (or at least since 1988, think “Wild, Wild West” by Escape Club).

One possible consequence of all this issuance of longer-dated paper maybe a decreased need to issue Commercial Paper (CP). The CP market contracted for the seventh consecutive week falling another -$21.2 billion to $943.6 billion outstanding.

We have the next FOMC meeting on Tuesday and Wednesday.

To all of you who attended the Annual Conference in Miami Beach, what a pleasure it was to meet and spend a little time with you. See you all in Vegas next year.

This Week in Corporate Finance (10/12/12)

 In this holiday-shortened week, the financial markets continued to fret about the lack-luster pace of economic growth. The short-end of the market was basically unchanged, while the further out one went on the maturity curve, the greater the impact was.

For the week, the US 2-year Treasury note yield was unchanged at 26bps; the 5-year note was down -1bp 66bps; the 10-year note was down -6bps 1.67%; and the 30-year bond was down -11bps to 2.86%.

In Germany, there was basically no movement in the Bund market as the 30-year Bund yield was -3bps lower, falling to 2.34%; the 10-year Bund fell -2bps to 1.50%; and the 2-year Bund fell by -1bp to 5bp. The 10-year French Oat witnessed a bit of a rally as its yield fell -10bps to 2.19%.

It was a quiet week in Italy, as their 10-year bond was better, but only by -3bps, settling at 5.02%. Things were a little weaker this week in Spain, but not terribly so. The Spanish 10-year bond was weaker by +7bps, to finish the week at 5.76%. It didn’t help Spain that S&P cut their credit rating by two notches to BBB-.

Yields were a bit better in Portugal as their 10-year bond fell by -10bps to close the week at 8.12%. It was even a quiet week in Greece, as their 10-year bond continued to improve but to a smaller degree this week. Their 10-year bond yield was -15bps better, falling to 18.32%.

Issuers continue to find plenty of investor appetite for their bonds. Mizuho came to the market with a $2.5 billion two-tranche deal comprised of $1.5 billion of a 5-year note and $1.0 billion of a 10-year note.

The market will be looking forward to the two-day FOMC later this month on October 23^rd & 24^th.

I’m looking forward to seeing many of you this week at AFP’s Annual Conference in Miami Beach.