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.

This Week in Corporate Finance (02/08/13)

The world has been a relatively stable place for the past two weeks, quite a change from the environment of most of the past five years. The stock market has grown comfortable at its current lofty heights, while at the same time, we’ve witnessed no mass exodus out of the fixed-income market. We seem to be enjoying a bit of a Goldilocks moment, how long it remains has yet to be seen.

While we have seen the US Treasury market bounce around a bit, net-net, it’s been relatively calm. The US 2-year note yield was down -2bps to 25bps; the 5-year note yield was unchanged at 84bps; the 10-year note yield was up +2bps to 1.96%; and the 30-year bond yield was up +5bps to 3.17%. The market seems to be relatively comfortable with bond yields in this ballpark, a reflection of a US economy growing around +2.5%, with little to no inflation. The front-end of the curve is anchored to the Fed, with the belief that interest rates will remain relatively low for the next two years. As long as there is no perceived risk of inflation, the level of absolute rates should remain relatively stable.

The US Treasury announced that it plans to incorporate floating-rate debt into its regular funding mix. The Treasury expects to auction its first floating-rate note (FRN) within the next twelve months.

In Europe, the German and French markets were also relatively stable. The 30-year German Bund yield is -3bps lower at 2.38%, the 10-year German Bund yield is also -3bps lower at 1.61%, and the 2-year German Bund has rallied a bit more, down -7bps to +18bps. The French 10-year Oat yield was basically unchanged, up +2 bps to 2.24%.

The Italian 10-year note yield has backed up a bit, as investors felt that maybe it had dropped too far too quickly. After falling -264 bps between late July and late January (from 6.71% to 4.07%) the yield has risen +48bps to 4.55%, still quite an improvement since the summer. It was a similar story for Spain, though not to the same degree. The Spanish 10-year note yield rose +19bps to 5.36%. Its yield peaked back in July at 7.75%.

Concerns about Portugal and Greece flared again over the past two weeks, but nowhere near the same intensity we witnessed last year. The Portuguese 10-year note yield backed up +42bps to 6.55% and the Greek 10-year note yield rose +62bps to finish the week at 10.93%.

In US equities, we saw the major indexes touch multi-year highs and then maintain their recent gains. The Dow reached a new multi-year high of 14,022.62 on Friday, while the NASDAQ flirted with a new twelve-year high of 3,197 while the S&P 500 rose up to 1,518.31.

In money-market land, LIBOR was in the news for two reasons this week. First, the 3-month LIBOR rate fell to its lowest level since August 15, 2011, at 29.2bps; and second, another bank paid a substantial fine related to the manipulation of LIBOR. This time it was RBS paying a fine of $612 million for its part in this ongoing scandal.

After having the busiest year on record for corporate debt issuance ($3.96 trillion), we got 2013 started with a bang by having the busiest January on record ($412.3 billion). Things did not slow down at all as February began. Virgin Media raised $3.65 billion, Imperial Tobacco and AT&T each raised $2.25 billion, and IBM raised $2 billion.

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.