This Week in Corporate Finance (06/14/13)

 

I believe the word “volatility”, pretty much sums up the past three weeks. Following the US equity market indexes peaking on May 22^nd, the investor community has been trying to figure out how the next chapter of the recovery story is going to play out. With the Federal Reserve mentioning that as the US economy improves, the need for stimulus will decrease, the market has been trying to contemplate going back to a more “normal” environment, where economics trumps government policy. Investors will continue to try and glean how all the markets (bond, equity, commodity, currency, and money-market) will react to less easing, which is not the same as a neutral stance, and certainly not the same as a tightening. (By the way, we needed to eliminate the word “tapering” from the lexicon).

 US Treasury yield levels have risen over the past three weeks but it hasn’t been any kind of bloodbath. During this period, the US 2-year note yield is up +2bps to 27bps; the 5-year note yield is up +14bps to 1.03%; the 10-year note yield is up +11bps to 2.12% (after being as high as 2.29%, its highest level since April 2012); and the 30-year bond yield is up +13bps to 3.30% (after being as high as 3.43%, its highest level since April 2012).

It is interesting to note how the shape of the yield curve has changed over the past twelve months. The T-bills have actually rallied -6 to -8bps, while the 30-year bond has sold-off +55bps and the 2yr/30yr spread has widened +57bps to +301bps. The market continues to price-in “no” Fed tightening until late 2015.

US mortgage rates have also increased of late. The average 30-year fixed-rate mortgage is currently at 3.98%, up from its record-low of 3.31% back in November, and the average 15-year fixed-rate mortgage is at 3.10%, up from its all-time low of 2.56%. Both yields are still at very low levels.

US equity indexes are off a bit since last month’s highs, with the Dow off -2.8% from its high, but still up +19.31% over the past twelve months; the S&P 500 is off -3.4%, but still up +22.55%; and the NASDAQ is off -2.9%, but still up +20.77%. 

In Germany, yields are higher over the past several weeks, but off from their recent highs. The 30-year Bund yield is up +7bps to 2.37% (it topped out at 2.45%), the 10-year Bund yield closed at 1.53%, up +10bps (though off from 1.66%), and the 2-year Bund yield is +12bps higher at +13bps (still off from +24bps). The French 10-year Oat yield is up +15bps to 2.09% (2.28% was the recent high).

It was a similar story in Italy and Spain. The Italian 10-year note yield was up +14bps to settle at 4.28% (down from 4.47%) and the Spanish 10-year note yield finished the week at 4.59%, up +17bps but still lower than its high of 4.76%.

Portugal and Greece were the recent dogs of sovereign debt. The Portuguese 10-year note yield was up +77bps to close at 6.30% (after touching 6.65%) and the Greek 10-year note yield was up +107bps to settle at 9.93% (after soaring as high as 10.80%).

Commodity prices have been a bit choppy of late. Oil finished the week near its 90-day high at $97.80/barrel, while natural gas, on the other hand, is trading at a multi-month low of $3.753. Silver is trading at a near 33-month low of $22/oz and cooper is at a one-month low of $3.20.

The corporate debt market continues to be active even with the recent back-up in yields. EMC led the way with their $5.5 billion three-tranche transaction, their first offering since 2007. The deal was comprised of $2.5 billion of 5-year notes, $2 billion of 7-year notes, and $1 billion of 10-year notes. Pfizer was in the market with its first US-dollar denominated deal since 2009. It was a $4 billion five-part transaction consisting of $750 million of a 3-year note, $1 billion of a 5-year note, $500 million of a 5-year FRN, $1 billion of a 10-year note, and $750 million of a 30-year bond.

The long-awaited SEC proposals for structural changes to the money-market industry were recently released. Issues addressing the introduction of a floating NAV for Prime funds and the ability to suspend redemptions were introduced for public comment.

The upcoming scheduled FOMC meeting on June 18^th and 19^th will provide the Fed with the opportunity to clarify its recent comments on the idea and timing of a reduction of bond purchases. The market will be keenly focused on the press release following the end of the meeting.