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!