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!