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

 At press time, we continue to sit upon the precipice of the “Fiscal Cliff” with echoes of Europe’s 1986 hit “The Final Countdown” droning on in the background. The government of the United States seems wholly incapable of steering the ship of state away from a Titanic-like disaster and we will just have to wait-and-see if there will be a last minute solution. We have no idea how the world’s financial markets will react on Wednesday morning if no agreement is reached by the time the Times Square Ball touches down on New Year’s morning.

With the uncertainty as to what will transpire between now and the end of the year, investors moved towards safety at the expense of yield. For the week, the US 2-year note yield was down -2bps to 25bps; the 5-year note yield was down -5bps to 71bps; the 10-year note yield was down -7bps to 1.70%; and the 30-year bond yield was down -7bps to 2.87%. The 4-week T-bill yield fell as low as negative -4.5bps (its lowest level since December 2008), before ending the week at 0.00%. With the expected expiration of the TAG program, the market will be watching closely to see if there is a significant migration of cash away from bank deposits and into other money-market products. Depending on the degree of the migration, interest rates on the front-end of the money-market curve could stay in negative territory for the foreseeable future.

It was a similar story in Germany, as safety trumped return. The 30-year Bund yield fell -7bps to 1.31%, the 10-year Bund dropped -8bps to 2.17%, and the 2-year Bund was unchanged at negative -1bp. The 10-year French Oat had a quiet week, up +1bp to 1.995%.

It was a quiet week across the rest of Europe as well. The Italian 10-year note was a touch weaker with its yield rising +2bps to 4.497%, the Spanish 10-year note was unchanged at 5.255%, the Portuguese 10-year note was unchanged at 7.01%, and the Greek 10-year note yield was off slightly, +1bp to 11.90%.

Corporate bond issuance is now pretty much shut down for the rest of the year, after having set a global issuance record of $3.94 trillion. Borrowing costs touched an all-time low this week of 3.27%.

While political news continues to grab all the headlines, we do have the always-important Employment report coming out this Friday. Consensus is looking for Payrolls to increase by +157k and for the Unemployment rate to creep up +0.1% to 7.8%. The next FOMC meeting is scheduled for January 29^th – 30^th.

Have a wonderful New Year!

This Week in Corporate Finance (12/14/12)

 The Federal Reserve couldn’t have been any more clear this week as to what signposts they will be following to help them determine when is the appropriate time to apply the brakes to the US economy. At the conclusion of this last scheduled FOMC meeting of 2012, the Fed took the extraordinary act of declaring that until the Unemployment rate drops to 6.5% AND the Inflation rate increases to at least 2.5%, the Fed will take no action to slow the economy down. I think it’s important to remember that this will still be a guideline rather than a strict formula. If the Fed starts to see yellow lights flashing on their economic dashboard of KPI’s, they will take whatever action they believe is appropriate.

In addition to this new explicit framework, the Fed announced an expansion of their current QE3 strategy (or the start of QE4, depending on your point of view), starting the first of the year. The Fed will begin to purchase $45 billion of Treasuries, in addition to the $40 billion of mortgage debt they are currently purchasing on a monthly basis. As 2012 winds down, so too will Operation Twist, a $667 billion program where the Fed purchased longer-dated Treasuries and sold shorter-dated ones.

Between the news of the Fed potentially stoking future inflation and no progress being made on the “Fiscal Cliff” front, US Treasuries stumbled a bit this week. For the week, the 2-year note yield was down -1bp to 23bps (we’re not expecting the 2-year yield to vary much over the next three years); the 5-year note yield was up +7bps to 69bps; the 10-year note yield was up +8bps to 1.70% (after being as high as 1.75%); and the 30-year bond yield was up +6bps to 2.87% (after being as high as 2.93%).

The 4-week T-bill yield actually fell into negative territory, for the first time since January, as investors may be moving money out of bank deposits and into short-dated Treasury bills via outright purchases, Repo and money-market funds. With no news out of Washington that the TAG program will be extended past its current expiration date of December 31^st, investors may be concerned about their potential counterparty risk exposure.

It was a relatively quiet week in Germany. The 30-year Bund yield was unchanged at 2.24%, the 10-year Bund yield sold-off +5bps to close the week at 1.35%; and the 2-year Bund moved closer to yield zero percent, as it settled the week +4bps higher, but still in negative territory yielding -4bps. It was a similar story in France as their 10-year Oat was +2bps higher but still under two percent at 1.98%.

It was a slower week in the corporate bond market as a historic year finishes up with just two major deals to report on. Crown Castle International raised $1.5 billion in a two-tranche offering consisting of $500 million of a 5-year note and $1 billion of a 10-year note. Harbinger Group issued $700 million of a note due in July 2019.

Our thoughts and prayers go out to the victims and families of the tragic event in Connecticut.