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.