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.  

 

This Week in Corporate Finance (04/12/13)

This was another week where the equity markets touched new or multi-year highs, the bond market sold off a bit, and the economic outlook is lukewarm at best. Time will tell if we have finally moved to a period of determining how fast the US economy is growing, rather than asking: is the US economy growing?

For the week, the US 2-year note yield was up +1bp to 23bps; the 5-year note yield was up +2bps 69bps; the 10-year note yield was up +4bps to 1.72%; and the 30-year bond yield was up +8bps to 2.92%.

On the equity front, we are all getting ready to put on our Dow 15K caps, as the Dow hit a new all-time high of 14,887.51. The S&P 500 touched an all-time high of 1,597.35 and the NASDAQ reached another twelve-year high of 3,306.95 (think ‘N Sync’s “It’s Gonna Be Me”).

In Europe, it was a similar “risk-on” trade as money moved out of the safest investments, into those offering a bit more yield. In Germany, the 30-year Bund yield was +9bps higher, closing the week at 2.18%; the 10-year Bund yield was up +5bps to finish at 1.26%; and the 2-year Bund yield was +1bp higher, to settle at +2bps. In France, the 10-year Oat yield was +6bps higher, ending the week at 1.81%.

Some of this money moved into countries like Italy, Spain, and Portugal, as their yields all fell by a similar amount. In Italy, the 10-year note yield fell -5bps to 4.33%; in Spain, the 10-year note yield dropped -6bps to 4.69%; and in Portugal, the 10-year note yield fell -5bps to 6.31%.

The big winner of the week was Greece, as its 10-year note yield plummeted -77bps to 11.38%.

Corporate bond issuance was a bit on the light side this week at $23 billion. Leading the pack this week was CNCP with their $2 billion three-tranche deal comprised of $750 million of a 3-year note, $500 million of a 5-year note, and $750 million of a 10-year note. Dollar General was also in the market with their $1.3 billion two-part offering consisting of $400 million of a 5-year note and $900 million of a 10-year note.

In money-market land, 3-month LIBOR touched a 20-month low falling to 27.71 bps.

On the commodities front, gold actually fell into bear territory this week as its price fell to a low of $1,493.35/oz. Gold has now fallen more than twenty percent since it all-time high of $1,920.30/oz, back in September 2011. This is the first time gold has been in a bear market in twelve years.

Oil fell as low as $90.27/barrel (WTI) on fears that the global demand for energy will be less than previously expected.

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This Week in Corporate Finance (04/05/13)

The see-saw which is the US economy continued again this week as a weaker-than-expected Payrolls report put a bit of a damper on the recent positive narrative we had been witnessing. Concerns about the economy not being as robust as previously thought caused money to move in a classic “risk-off” trade and US Treasury securities were the beneficiaries at the expense of the equity market.

For the week, the US 2-year note yield was down -2bps to 22bps (as the market is pricing in no-move by the Fed until late 2015); the 5-year note yield was down -9bps to 67bps; the 10-year note yield was down -17bps to 1.68%; and the 30-year bond yield was down -26bps to 2.84%.

Prior to the Employment report, US equity indexes hit new highs earlier in the week. The Dow touched 14,684.49 before finishing the week at 14,514.50 and the S&P 500 reached 1,573.66 before closing the week at 1,546.92.

In Europe, the hangover from Cyprus continues, and investors are favoring safety over yield. The idea that the US economy may be growing at a slower pace than previously expected did nothing to improve the mood. Investors seeking safety continued to pile money into Germany and France. The German 30-year Bund yield fell -13bps to 2.09%; the 10-year Bund yield dropped -8bps to 1.21% (not far from its all-time low yield of 1.127%); and the 2-year Bund yield actually rose +3bps to end the week at +1bp. I guess the idea of locking in a guaranteed loss, lost some of its appeal this week. In France, the 10-year Oat yield fell -28bps to a new all-time low of 1.75%.

Investors were feeling more comfortable with Italian credit as the yield on their 10-year note fell by -38bps to 4.38%. It was a similar story in Spain as their 10-year note yield dropped -31bps to 4.75%. Even Greece saw their 10-year note yield fall by -29bps to 12.15%. Only in Portugal did investors take a wait-and-see approach as the yield on its 10-year note was basically unchanged at 6.36%.

Even with the uncertainty of the strength of the US economy, the issuance of corporate debt continues unabated. Wal-Mart issued a four-tranche, $5 billion offering consisting of $1 billion of a 3-year note (priced at UST +30bps, the tightest spread of any 3-year this year); $1.25 billion of a 5-year note; $1.75 billion of a 10-year note; and $1 billion of a 30-year bond. Home Depot was also in the market this week with a two-part $2 billion transaction comprised of $1 billion of a 10-year note and $1 billion of a 30-year bond.

With increased production (US crude stockpiles currently stand at 388.6 million barrels – think “Nothing Compares 2 U – by Sinead O’Connor), and the weaker Employment report, oil experienced its worst week in 6 months as West Texas crude dropped to as low as $91.91/barrel.

Gold, on the other hand, rallied after the report. After touching an almost ten-month low of $1,540.29/oz, gold rallied to close at $1,577.80/oz.

The market will be waiting for the next scheduled FOMC meeting on April 30^th and May 1^st to see if any change in Fed policy is on the horizon.

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.