This Week in Corporate Finance (03/29/13)

Welcome to the end of the first quarter and to a hopeful beginning of a healthy and prosperous second quarter. While we continue to experience some headwinds coming out of Europe, the mood here is one of guarded optimism. The bond market continues to hold in and the stock market keeps reaching new highs. All of the losses of the financial crisis have been recouped (as least as far as the equity indexes are concerned), and the housing and job markets continue to improve.

For the holiday-shortened week, the US 2-year note yield was down -1bp to 24bps; the 5-year note yield was down -3bps to 76bps; the 10-year note yield was down -6bps to 1.85%; and the 30-year bond yield was down -3bps to 3.10%. Even with yields dropping this week, this is the first time in two years that rates have backed up in two consecutive quarters.

Since September 30^th, the 2-year note yield was up +1bp from 23bps (and we don’t expect the 2-year’s yield to vary much until the Fed changes its accommodative policy); the 5-year note yield was up +14bps from 62bps; the 10-year note yield was up +22bps from 1.63%; and the 30-year bond yield was up +28bps from 2.82%.

The US stock market continues on its recent tear. The S&P 500 finally broke through its previous historical high (1,565.15) and reached 1,570.28. The Dow touched a new all-time high of 14,578.54 and enjoyed its best first quarter since 1998 (think Will Smith’s “Getting’ Jiggy Wit it”). The NASDAQ hit a new multi-year high of 3,270.30.

Europe continues to feel the effects of the current financial crisis in Cyprus. Money continues to search out safety, with Germany being one of the prime destinations. The German 30-year Bund yield was down -2bps to 2.22%, the 10-year Bund yield fell -9bps to 1.29% (not far from its all-time low yield of 1.127%), and the 2-year Bund ended the week down -3bps to yield 0.00% (after being as low as -4.4bps). It’s always a bit scary when investors are willing to lock in a guaranteed loss rather than risk losing even a greater amount of principal. The French 10-year Oat yield was basically unchanged at +1bp to 2.03%.

The weaker sovereign credit in Europe fared poorly as concerns about Cyprus and the entire European sector weighed on investors’ minds. The Spanish 10-year note was off +20bps to end the week north of five percent at 5.06%; the Italian 10-year was weaker by +22bps to settle the week at 4.76%; the Portuguese 10-year note yield rose by +35bps to finish the week at 6.37%, and Greece fared the worst, as their 10-year note yield was off by +56bps to close the week at 12.44%.

This Friday, the US Employment report for March will be released. It is expected to show that payrolls grew by 195,000 and the Unemployment rate was unchanged at 7.7%.

This Week in Corporate Finance (03/22/13)

You know it’s an interesting week in the market when the first order of business is a geography lesson. At least here in the US, many of us had to Wiki “Cyprus” first thing Monday morning to learn where the heck the island nation is located. It’s east of Greece and south of Turkey and it is a member state of the European Union (EU).

We spent most of the week going back-and-forth as to whether Cyprus could be another Greece. The debt and equity markets rallied and fell depending on the latest news out of Nicosia. The general feeling at week’s end was that while this was probably not going to be a major disruption to the world financial markets, if there was going to be any impact, it would be a Euro-centric issue.

Over the past two weeks, US Treasury yields were mostly lower due to reassuring words from the Fed at its most recent FOMC meeting concerning the continuation of quantitative easing and a lack of any imminent inflation threat. The US 2-year note yield was unchanged at 25bps; the 5-year note yield was down -10bps to 79bps; the 10-year note yield was down -15bps to 1.91%; and the 30-year bond yield was down -12bps to 3.13%.

In Europe, there were definitely winners, losers and a big loser. No surprise as Germany was considered a sanctuary of safety. The 30-year Bund yield fell -13bps to 2.24%; the 10-year Bund yield dropped -15bps to 1.38%; and the 2-year Bund yield deceased -5bps to finish the week at +3bps (after falling as low as negative -0.6bp). The 10-year French Oat yield fell -11bps to 2.02% (after being as low as 1.98%) and the Italian 10-year note dropped -8bps to settle at 4.52%.

The Spanish 10-year note yield sold off a bit, rising +10bps to 4.86% (after being as high as 5.08%). The Portuguese 10-year note suffered from the Cypriot fears, as its yield was up +8bps to close at 6.02% (but down from its high yield of 6.33%).

Poor Greece suffered the most this week as events in Cyprus reminded the world how weak Greece is. Their 10-year note yield rose +133bps to 11.88% (after touching 12.15%, its highest level since December).

The equity market continues to dance at all-time, near all-time or multi-year highs. The Dow touched a new all-time high of 14,546.82, up +20.87% since last June. The S&P 500 peaked at 1,563.62, so very close to its all-time high of 1,565.15, still up +23.44% since June. The NASDAQ reached 3,260.62, up +19.58% since the lows of June.

As a reality check, I always think it’s a good exercise to look back to where we were a year ago. Most pundits believe the US economy is stronger today than where we were 365 days ago. Yet while the equity market certainly shares that belief (see above), the behavior of the bond market is somewhat counterintuitive. The US 2-year note yield is -12bps lower from 37bps; the 5-year note yield is down -33bps from 1.12%; the 10-year note yield is down -37bps from 2.28%; and the 30-year bond yield is down -23bps from to 3.36%. Money has been moving into both the fixed-income and stock markets. This may be due to the belief that the US is the best place to have your money in the short-term.

Investor appetite for new-issue corporate debt issuance continues unabated. NBCUniversal led the pack with their four-tranche $4 billion offering comprised of $700 million of a 3-year FRN, $700 million of a 5-year FRN, $1.1 billion of a 5-year note and $1.5 billion of a 6-year note. Medtronic was not far behind with their three-part $3 billion transaction consisting of $1 billion of a 5-year note, $1.25 billion of a 10-year note and $750 million of a 30-year bond.

Happy Spring!

This Week in Corporate Finance (03/08/13)

As the employment report was released on Friday morning, all I could hear on the soundtrack in my brain was Lou Levin singing “Happy Days are Here Again”.  For those looking for signs that the US economy is finally pulling out of its morass, this was probably the best week in at least four or five years.

The Payroll number came in at an above-consensus +236k (versus +171k expected) and the Unemployment rate fell lower than expected to 7.7% (7.8% was the consensus). With the rate now at its lowest point since December 2008, and the strong gain in the jobs number, it was definitely “risk-on”. The stock market hit new higher highs and the US Treasury market sold-off as money that had been on the sidelines came rushing back in.

The S&P climbed as high as 1,552.48 tantalizingly close to its all-time high of 1,565.15, reached back in October 2007. The Dow broke through the 14,400 barrier to peak at 14,413.17, a new all-time high. We are now only about four percent away from breaching Dow 15K. The NASDAQ also touched a new multi-year high of 3,248.70.

On the flipside, the US 2-year note yield was up +2bps to 25bps (after being as high as 26bps); the 5-year note yield was up +14bps to 89bps (after being as high as 91bps); the 10-year note yield was up +20bps to 2.06% (after being as high as 2.08%, its highest level since April 5, 2012); and the 30-year bond yield was up +19bps to 3.25% (after being as high as 3.28%).

It was a similar story in Europe as investors were more interested in yield than principal protection. The safety offered by German Bunds lost a bit of its shine due to the positive developments in America. The 30-year Bund was off +10bps to finish at 2.37%, the 10-year Bund was weaker by +12bps to close at 1.53%, and the 2-year Bund yield rose +6bps to settle at +9bps. All was relatively calm in France as its 10-year Oat was basically unchanged at +2bps, ending the week at 2.13%.

Italy witnessed a small relief rally in its 10-year bond as the yield dropped -19bps to 4.60%, but is still elevated from its recent low yield of 4.07%. Spain saw a healthy rally in its credit as its 10-year note yield pushed through the 5% barrier and dropped -34bps to 4.76%, its lowest level since November 2010.

Similar to Spain, Portugal watched as money poured into its name as investors felt more comfortable moving down the credit-curve in search of more yield. The Portuguese 10-year note fell -40bps to close at 5.94%, breaking through the 6% barrier to its lowest yield since October 2010. Money also moved into Greek securities as their 10-year noted rallied -49bps to drop to 10.55%.

Corporate debt issuance slowed a bit this week, though deals continue to come down the pike. Burlington Northern was in the market with their $1.5 billion two-tranche offering comprised of $700 million of a 10-year note and $800 million of a 30-year bond. ILFC was also in the market with their $1.25 billion two-part transaction consisting of $750 million of a 5-year note and $500 million of an 8-year note.

Given all the recent positive news, market participants will be watching closely for any hints that the Fed is considering slowing down their stimulus activity. The scheduled FOMC meeting on March 19^th & 20^th may have a bit more of the financial community (and media) watching than has been the case of late.

This Week in Corporate Finance (03/01/13)

Welcome to March. Normally this is the time of year where most market participants in the US are brushing up on their bracketology skills in preparation of March Madness. Instead we are faced with a situation worthy of a Rod Sterling voiceover, “You're traveling through another dimension -- a dimension not only of sight and sound but of mind. A journey into a wondrous land whose boundaries are that of imagination. That's a signpost up ahead: your next stop: the Sequester Zone!”

Over the past two weeks, the market has been a bit bipolar, optimism about the growth potential for the US economy (reflected in the equity market) versus concern about the lack of growth potential in the US and world economies (reflected in the bond market).

Here in the US, we witnessed multi-year highs for a number of stock indexes. The Dow touched 14,149.15, its highest level since October 2007, and only 15 points away from its all-time high. The S&P 500 reached 1,530.94, also its highest level since October 2007, and also only 15 points from its all-time high. The NASDAQ rose as high as 3,213.60, its highest level in over 12 years, November 2000, but still quite a way off from its high of 5,132.52 reached in March 2000. The hope that the US economy is poised for a healthy economic expansion is one of the underpinnings for the recent rise in the stock market.

On the flipside, fear that the US and parts of the rest of the world (ROW) are slowing down, caused money to move into the safest investments. The US 2-year note yield was down -3bps to 23bps; the 5-year note yield was down -10bps to 75bps; the 10-year note yield was down -15bps to 1.85% (after being as low as 1.84%); and the 30-year bond yield was down -12bps to 3.06% (after being as low as 3.04%).

The story in Europe continues to be one of economic weakness and uncertainty. When there is uncertainty, we often witness a flight-to-safety. In Germany, the 30-year Bund yield has dropped -15bps to 2.27%; the 10-year Bund yield has fallen -24bps to 1.41%; and the 2-year Bund yield has dropped -16bps to +3bps. In France, the 10-year Oat yield fell -17bps to 2.11%. Spain has also rallied of late, with its 10-year note yield falling -9bps to 5.10%.

In Italy, the country is suffering from the twin effects of an election and a resignation. On the political front, Italy held an election and nobody won (rings a little familiar to the US, as in 2000). Also not helping the country’s psychological state, Benedict XVI became the first pope to resign since Gregory XII in 1415 (ending the Western Schism). The 10-year Italian note yield rose as high as 4.96% (the highest level since November), before closing the week at 4.79%, +41bps.

Portugal has suffered a bit of late as its 10-year note has sold-off, with its yield rising +19bps to 6.38%. Greece was also weaker, with its 10-year note yield rising +13bps to 11.04%.
The currencies in Europe are also weaker. The Euro fell through $1.30 for the first time in two months, falling to a low of $1.2973. The British pound fell to its lowest level versus the US dollar since July 2010, dropping to $1.5010 (of course, after I just visited).

On the corporate-debt issuance front, we just experienced our busiest week since late January. Freeport-McMoRan lead the way with their $6.5 billion four-tranche deal consisting of $1.5 billion of a 5-year note, $1 billion of a 7-year note, $2 billion of a 10-year note and $2 billion of a 30-year bond. PepsiCo raised $2.5 billion with their offering comprised of $625 million of a 3-year FRN, $625 million of a 3-year note and $1.25 billion of a 10-year note. Coca-Cola was also in the market with its own $2.5 billion transaction, made up of $500 million of a 2-year FRN, $1.25 billion of a 5-year note and $750 million of a 10-year note. In addition, Whirlpool raised $500 million with $250 million of a 10-year note and $250 million of a 30-year bond, their first 30-year issuance since 1986 (think “Life in a Northern Town” by the Dream Academy).

In additional to watching for developments coming out of D.C. and Europe, the market will be focused on the upcoming Employment report (March 8^th), the next scheduled FOMC meeting (March 19^th and 20^th) and quarter-end.