This Week in Corporate Finance (01/25/13)

So whether one was in New York, London (where I’ll be this week), or Davos, the overwhelming emotion of the week was definitely one of optimism. The stock market continues to rally, the economic news has been pleasant, and the United States government’s desire to commit political and economic hari-kari seems to have been minimized (at least for now).

The S&P 500 crossed the 1,500 level to reach its highest level since December 2007 at 1,502.96. The S&P is on its longest winning streak since November 2004.  The Dow is now at its highest point since December 2007 at 13,895.98, and is less than two percent away from its all-time high of 14,164 reached back in October 2007. The NASDAQ is also up in the month of January but not back to its multi-year high of 3,196.93 reached back in September. The price drop of Apple stock has been a constraint on the NASDAQ.

It’s interesting to note that even with the US stock market at its recent highs, from a historical earnings yield perspective, stocks still look quite attractive. Currently the earnings yield spread between the S&P 500 and the UST 10-year note is approximately 475bps. Back in the summer of 2007 this spread, also known as the equity risk premium (ERP), was only 70bps, and back in March 2000 the ERP was actually -280 bps.

This was definitely a “risk-on” week, as money moved from safety to yield. The US 2-year note yield was up +2bps to 27bps; the 5-year note yield was up +8bps to 84bps; the 10-year note yield was up +9bps to 1.94%; and the 30-year bond yield was up +8bps to 3.12%.

Another source of fuel for the current stock rally may be bank deposits. Since expiration of the TAG program, in the week ending January 9^th, $114.1 billion in deposits left the banking system, the fastest drop in deposits since 9/11. With the loss unlimited insurance, those deposits earning no-interest are even more unattractive.

The corporate bond market was active, but it couldn’t maintain last week’s record pace. With corporate bond yields falling to a record low this week of 3.526%, PNC led domestic issuers with their $1.75 billion three-tranche transaction comprised of $750 million of a 3-year note, $250 million of a three-year FRN, and $750 million of a 10-year note.

All eyes will be on the Fed this week as the first scheduled FOMC meeting occurs on Tuesday and Wednesday. The Market will be scouring the Fed’s comments, trying to divine when the Fed might remove the stimulus punchbowl.

Given the improvement in the most recent Jobless Claims reports (currently at a five-year low), the impact of Employment report scheduled for release this Friday may carry greater weight.

This Week in Corporate Finance (01/18/13)

Maybe this week will be a trend-setter for the rest of 2013, the stock market touching new 5-year highs while the bond market is relatively quiet. To reference our previous Fed Chairman, maybe we have found a Goldilocks moment. The economic and earnings news was rather pleasant and the market reacted accordingly.

For the week, the US 2-year note yield was unchanged at 25bps; the 5-year note yield was down -3bps to 76bps; the 10-year note yield was down -5bps to 1.85%; and the 30-year bond yield was down -4bps to 3.04%.

It was an interesting week in Germany as their yield curve flattened significantly. The 30-year Bund yield rallied -13bps to drop to 2.32%, their 10-year Bund yield was basically unchanged at -2bps to 1.56%, and their 2-year Bund sold-off by +5bps, rising to +18bps, its highest level since April. It was a similar story in France, with their 30-year Oat yield down -11bps to 3.07%, their 10-year Oat yield down -2bps to 2.13%, and their 2-year Oat yield up +7bps to +23bps. There is a general feeling that the economies of these two countries will grow, albeit at a non-inflationary pace.

Net-net, the Italian 10-year note took a bit of a breather this week, with its yield increasing by +4bps to 4.17%. After its recent tear from a high yield of 6.60% back in July, investors are questioning how much lower rates can fall from this point on. Can the yield drop below four percent, last seen in November 2010? The Spanish 10-year note sold-off with its yield jumping +19bps to 5.08%, after falling as low as 4.84% last week. Similar to Italy, the Spanish 10-year has been on a tear, falling from 7.75% back in July.

The Portuguese 10-year note continued its winning ways of late, with its yield rallying another -9bps to 6.12%, its lowest level since December 2010. Quite a drop from its 18.29% level of January 2012. The Greek 10-year yield fell -72bps to 11.03%, close to its recent low yield.

In the equity markets, both the Dow and the S&P 500 touched new 5-year highs (think Kanye West’s “Good Life”). The Dow rallied to close at 13,649.70, while the S&P reached 1,485.98. Year-to-date, both indexes are now up over four percent.

Last week ended up being the busiest week ever for corporate bond issuance as companies brought over $126 billion to market. Quite an impressive start to 2013, after 2012’s record breaking $3.95 trillion. This week was led by ConAgra’s four-tranche $3.98 billion transaction comprised of $750 million of a 3-year note, $1 billion of a 5-year note, $1.225 billion of a note, and $1 billion of a 30-year bond. Jefferies was also in the market with a two-part $1 billion offering consisting of $600 million of a 10-year note and $400 million of a 30-year bond. 

The Commercial Paper (CP) market continues to grow. This was the twelfth-consecutive week the CP market increased, the longest streak since July 2007. The CP market is now at its greatest outstanding at $1.133 trillion since August 2011 ($1.147 trillion).

Of note this week was the passing of Robert Citron, the former treasurer of Orange County, California. Those of us in the Agency, Derivatives, or Money Markets back in 1994, will remember Bob as someone whose interest rate bets (which lost about $1.7 billion) helped to drive Orange County into what was until 2011, the biggest county bankruptcy in US history.

This Week in Corporate Finance (01/04/13)

 It was a rather exciting way to start off a new year; a congressional “patch” to get us over the “Fiscal Cliff” (at least in the short-term), the Fed raising the specter of the end of governmental bond-buying in order to stimulate the economy, and an Employment report reinforcing the narrative of a growing (albeit slowly) economy. If one is a believer that the two overpowering emotions in investing are greed and fear, then this was a week to get out of the way of those looking for yield, as the rout was on for those assets regarded as safe havens.

US Treasuries were one of those investments that investors used to provide capital in order to purchase higher-yielding assets as this was definitely a “risk-on” week. For the week, the US 2-year note yield was up +1bp to 26bps (after being as cheap as 29bps); the 5-year note yield was up +10bps to 81bps (after being as cheap as 85bps); the 10-year note yield was up +20bps to 1.90% (after being as cheap as 1.97%, suffering through its worst backup in yield since March and touching levels not seen since April); and the 30-year bond yield was up +23bps to 3.10% (after being as cheap as 3.18%, its highest level since April).

There was quite a sell-off in German Bunds as well, with the 30-year Bund yield off +25bps to close the week at 2.42%, the 10-year Bund yield weaker by +23bps to finish the week at 1.54%, and the 2-year Bund yield higher by +9bps to return to positive territory at +8bps. To a lesser degree the 10-year French Oat sold-off, up +14bps to settle the week at 2.14%.

One of the places where one could pick up a bit of yield this week was in second-tier European sovereign credit. The Italian 10-year note yield dropped -23bps to 4.27%, its lowest level since November 2011.  The Spanish 10-year note yield was down -20bps to 5.06%, its lowest level since March.

The 10-year Portuguese note plunged through the 7% level this week, with its yield falling -69bps to 6.32%, its lowest level in over two years, going back to December 2010. The Greek 10-year note yield fell -65bps to 11.25%, its lowest level since February 2011.

US equity markets rallied nicely with this recent bout of optimism. The Dow was up nearly +500 points to close at 13,435, the NASDAQ was up +141 points to settle over 3,100 at 3,101.66, and the S&P 500 was up +64 points to finish at 1,466.47, its highest close since December 2007.

Money-market funds (MMFs) grew again this week, with their assets increasing by +$37.78 billion to $2.705 trillion. This is the first time the MMFs have been larger than $2.7 trillion since January 2011. MMFs have grown by $158.2 billion since October 31^st which may have been influenced by the expiration of the TAG program. We will continue to monitor the flow of funds.

The next scheduled FOMC meeting is later this month, January 29^th and 30^th, and for the first time in quite some time, the market may be paying particular attention.