This Week in Corporate Finance (10/26/12)

Again, we experienced another week where we spent most of our time dancing about on the point of precarious balance. Is the economy ok, or is it growing too slowly? Are third-quarter earnings so weak that they foreshadow a stalling economy or is the economy on the brink of an expansion? The market wants clear and definitive answers to these questions, but what lurks on the horizon is murky at best. The FOMC met and we received our first report on third-quarter GDP, but neither event caused us to move away from our slightly positive, but weaker-than-average recovery scenario.

For the week, the US 2-year Treasury note yield was up +1bp to 30bps (after being as high as 31bps); the 5-year note was up +1bp to 76bps (after being as high as 83bps); the 10-year note was down -3bps to 1.74% (after being as high as 1.85%); and the 30-year bond was down -4bps to 2.90% (after being as high as 3.00%).

The week was a moderately more volatile than the final marks for the week would indicate. We encountered quite a sell-off in the equity markets on Tuesday, with the Dow off -1.8%; crude oil fell to its lowest level since early July, touching $84.94/barrel; and gold fell through the $1,700 floor, dropping to as low as $1,698.70/oz.

In Europe, the short-end of the yield curve out-performed the back-end as the German 2-year Bund yield fell -6bps to 5bps; the 10-year Bund was -5bps lower to close the week at 1.54%, and the 30-year Bund was unchanged at 2.41%.  The French 10-year Oat was slightly weaker this week, rising +4bps to 2.25%.

Euro-zone fears contributed to a bit of a sell-off in the weaker sovereigns. In Italy, their 10-year note yield was off +13bps to 4.90%, while the Spanish 10-year note popped +22bps to 5.59%. It was reported this week that the Spanish unemployment rate hit a new all-time high of 25.02%.

The Portuguese 10-year note was weaker by +52bps, to close back over eight percent, at 8.08%, and while it was a setback, their 10-year note had fallen to a nineteen-month low of 7.56% last week. Similar to Portugal, Greece ended its recent winning streak, as its 10-year note backed-up +84bps this week, to settle back over seventeen percent, at 17.29%.

Corporate bond issuance wasn’t quite as busy this week, though a number of marquee transactions did come to market. Plains Exploration issued $3 billion in a two-tranche deal comprised of $1.5 billion each of an eight-year and a ten-year note. Reynolds American raised $2.55 billion with a three-part offering, consisting of $450 million of a three-year note, $1.1 billion of a ten-year note and $1 billion of a thirty-year bond. This was the first bond deal for Reynolds in over five years.

Chile issued debt this week at the lowest cost ever for a Latin American country. The $1.5 billion transaction was made-up of a 10-year note with a yield of 2.38% and a 30-year bond with a yield of 3.70%. This was Chile’s first US$ offering in over a year. Chile is rated Aa3 by Moody’s, the highest credit rating in Latin America.

Bolivia made news this week as it issued its first international bond since the 1920’s. They raised $500 million with a 10-year note yielding 4.875%. Bolivia is rated BB- by S&P.

For the eighth consecutive week, the Commercial Paper (CP) market contracted. Last week, the CP market shrank by -$19.2 billion to $924.4 billion, outstanding. The CP market hasn’t been this small since January 2011.

Everyone will be waiting for Friday’s Employment Report for the month of October. This will be the last employment update we receive before the U.S. Presidential election on Tuesday November 6^th.

Here on the East coast of the United States, we are bracing ourselves for the Frankenstorm, as we might be attacked by the worst storm in the past 100 years.

Let’s all be safe and smart out there!

This Week in Corporate Finance (10/19/12)

 This was another week where we just sort of moved from one end of the trading spectrum to the other, lacking any true conviction. The last two weeks have had a bit of a “Goldilocks and the Three Bears” feel to them. Last week we saw a push into US Treasuries, as investors were concerned that economic growth was “too slow”, and this week we saw a move out of US Treasuries as growth was viewed as “too fast” (not really but it makes better copy). Maybe next week the market will view the economy as “just right”.

As stated above, this was a “risk-on” week, at least until Friday. For the week, the US 2-year Treasury note yield was up +3bps to 29bps; the 5-year note was up +9bps to 75bps (after being as high as 77bps); the 10-year note was up +10bps to 1.77% (after being as high as 1.84% as late as Thursday); and the 30-year bond was up +8bps to 2.94% (after being as high as 2.98% and knocking at the door of 3.00%).

Yields in Germany acted in a similar manner to yields in the US, as more investors were willing to sacrifice safety for a bit more yield. The 30-year Bund was off +13bps to end the week at 2.41%; the 10-year Bund was off by +14bps to close at 1.59%; and the 2-year Bund was off +7bps to finish the week at 11bps. It was a rather muted week in France, as the 10-year Oat sold-off slightly to settle at 2.21%, up +6bps.

The Italian 10-year note rallied quite nicely, as it was one of the destinations where money was moving. For the week, the note’s yield dropped -21bps to 4.77%, its lowest level since June 2011. Similar to Italy, Spain saw quite an improvement in their cost-of-funds. Their 10-year note yield fell -26bps to 5.37%, its lowest level since April.

Portugal maintained its recent winning streak, with its 10-year note falling solidly through the eight percent level, to finish the week at 7.56%, down -47bps. The yield hasn’t been this low since March 2011. The story in Greece continues to be one of improvement, as their 10-year note continued its grind lower. For the week, the note finished -160bps lower, to close at 16.45%. One would have to go back to July 2011 to find the yield as low.

The corporate bond market came roaring back to life this week with a number of blockbuster deals. I’m old enough to remember when a $1 billion deal was almost considered too big to execute. This week we witnessed Oracle return to the market, after a two year hiatus, with a two-part $5 billion transaction comprised of $2.5 billion each of a five and a ten-year note. Xstrata came to market with a four-tranche $4.5 billion package consisting of $1.25 billion of a 3-year note, $1.75 billion of a 5-year note, $1 billion of a 10-year note and $500 million of a 30-year bond. Other marquee deals of the week included JPMorgan’s $2.85 billion, UnitedHealth’s $2.5 billion and HCA’s $2.5 billion. Companies have sold over $3 trillion of bonds so far this year, second only to 2009’s issuance. The cost of investment-grade debt fell to an all-time low of 2.676% this week. Another indicator of how bullish the market is on credit product, the two-year swap spread tightened to 8bps this week, a historical low (or at least since 1988, think “Wild, Wild West” by Escape Club).

One possible consequence of all this issuance of longer-dated paper maybe a decreased need to issue Commercial Paper (CP). The CP market contracted for the seventh consecutive week falling another -$21.2 billion to $943.6 billion outstanding.

We have the next FOMC meeting on Tuesday and Wednesday.

To all of you who attended the Annual Conference in Miami Beach, what a pleasure it was to meet and spend a little time with you. See you all in Vegas next year.

This Week in Corporate Finance (10/12/12)

 In this holiday-shortened week, the financial markets continued to fret about the lack-luster pace of economic growth. The short-end of the market was basically unchanged, while the further out one went on the maturity curve, the greater the impact was.

For the week, the US 2-year Treasury note yield was unchanged at 26bps; the 5-year note was down -1bp 66bps; the 10-year note was down -6bps 1.67%; and the 30-year bond was down -11bps to 2.86%.

In Germany, there was basically no movement in the Bund market as the 30-year Bund yield was -3bps lower, falling to 2.34%; the 10-year Bund fell -2bps to 1.50%; and the 2-year Bund fell by -1bp to 5bp. The 10-year French Oat witnessed a bit of a rally as its yield fell -10bps to 2.19%.

It was a quiet week in Italy, as their 10-year bond was better, but only by -3bps, settling at 5.02%. Things were a little weaker this week in Spain, but not terribly so. The Spanish 10-year bond was weaker by +7bps, to finish the week at 5.76%. It didn’t help Spain that S&P cut their credit rating by two notches to BBB-.

Yields were a bit better in Portugal as their 10-year bond fell by -10bps to close the week at 8.12%. It was even a quiet week in Greece, as their 10-year bond continued to improve but to a smaller degree this week. Their 10-year bond yield was -15bps better, falling to 18.32%.

Issuers continue to find plenty of investor appetite for their bonds. Mizuho came to the market with a $2.5 billion two-tranche deal comprised of $1.5 billion of a 5-year note and $1.0 billion of a 10-year note.

The market will be looking forward to the two-day FOMC later this month on October 23^rd & 24^th.

I’m looking forward to seeing many of you this week at AFP’s Annual Conference in Miami Beach.

This Week in Corporate Finance (09/28/12)

Welcome to the end of the third quarter for calendar 2012. I believe we are now entering into what is typically the most interesting quarter of the year. Now that the turn of the new year is approximately 90 days away, investors, issuers, and market participants of all stripes have begun to strategize what position they want to be in at year’s end, as well as, how they want to be positioned for the first quarter of 2013. Some of the elements making this year’s fourth quarter so interesting and exciting include a presidential election, the “Fiscal Cliff”, expiration of the “TAG” program, and a continued interest in the restructuring of Money Market Funds.

This week was a continuation of the “risk-off” trade as money moved out of riskier assets and into US Treasuries. For the week, the US 2-year Treasury note yield was down -3bps to 23bps; the 5-year note was down -5bps to 62bps; the 10-year note was down -12bps to 1.63% (now only up +8bps over the past four weeks); and the 30-year bond was down -12bps to 2.82% (now only up +15bps over the past four weeks). The 2-year/30-year curve flattened by -9bps to stand at +259bps (now only wider by +14bps over the past four weeks).

As we look back at the US Treasury market over the third quarter, net-net, there really wasn’t one big story that drove the entire curve one way or the other, the story is a bit more nuanced.  The 2-year note yield was down -7bps and the 5-year note was down -13bps, reflecting a belief that the shorter-end on the curve is anchored to low interest rates for the foreseeable future (or at least into 2015 – so says the Fed). The 10-year note was down -4bps and the 30-year bond was up actually +6bps, which reflects more of a concern (though still quite small) about inflation in the longer-term. It’s also very fair to say the longer-end of the curve was basically unchanged for the quarter.

One of the bigger stories of the third quarter was the Fed’s announcement that it would be purchasing $40 billion/month of mortgage securities, also known as QE III. As a result of the Fed’s announcement, mortgage rates fell to historical lows. This week, the average 30-year fixed-rate mortgage fell to 3.40% and the average 15-year fixed-rate mortgage fell to 2.73%. Of particular note was the fact that, while the 30-year Treasury note actually rose by +6bps, during the quarter, the 30-year mortgage rate fell by -26bps.

In Europe, as concerns flared-up again about the Euro-zone, money rushed towards safety this week as Germany was again seen as a safe port in the storm. The 30-year Bund yield was down -18bps to 2.25% and the 10-year Bund was down -17bps to 1.43%.  France was also seen as a safe haven as its 10-year Oat yield fell -10bps to 2.18%. In Italy, their 10-year note yield was higher by +5bps at 5.10%

Then there is Spain. Concerns that the economic situation there has taken a turn for the worse was reflected in their 10-year note yield as it spiked back over 6 percent (topping out at 6.11%) before dropping back under at 5.95% (up +19bps for the week).

Portugal was another country of concern this week as its 10-year note yield continued its recent climb. After being as low as 8.03%, two weeks ago, it broke back through the nine percent level (peaking at 9.18%) before closing the week at 9.00% (up +42bps for the week). 

The situation in Greece continues to improve (on a relative basis). Their 10-year bond yield fell another -43bps this week to close at 19.49%. The yield has now fallen -1148bps (from 30.97%) since May 31^st.

With the start of the new quarter, we will be receiving the monthly Employment Report on Friday and the next scheduled FOMC meeting, towards the end of the month on October 23-24^th.

This Week in Corporate Finance (09/21/12)

Just like the Washington Redskins, the markets cooled off a bit this week. While there is still plenty of optimism to go around and the future is looking brighter, it’s just a bit more tempered. Now that we are fewer than seven weeks to go before the US elections, there is a general feeling the markets may in stuck in a bit of a holding pattern until November 7^th. Of course, plenty of surprises may still await us over the next month and a half, so we will have to see what unfolds.

After quite a back-up over the past two weeks, buyers saw a bit of an opportunity to jump back into US Treasuries. For the week, the US 2-year Treasury note yield was up 1bp to 26bps; the 5-year note was down -4bps to 67bps; the 10-year note was down -11bps to 1.75% (still up +20bps over the past three weeks); and the 30-year bond was down -15bps to 2.94% (still up +27bps over the past three weeks). The 2-year/30-year curve flattened by -16bps to stand at +268bps (still wider by +23bps over the past three weeks).

On the mortgage front, both the thirty and fifteen-year fixed-rate product fell to all-time historic lows. The average 30-year mortgage touched 3.49% and the 15-year mortgage dropped to 2.77%. The Fed’s recent announcement of QE III, provided quite a bit of support to the mortgage market with the Mortgage/Treasury spread falling to its tightest level ever at +61bps (a drop of -34bps from last week).

It was a similar story in Germany this week. The 30-year Bund yield was -11bps lower at 2.43%; the 10-year Bund fell -11bps to 1.60%; and the 2-year Bund dropped -6bps to 3.6bps. It was a very quiet week in France, as the 10-year Oat was up +2bps to 2.28%.

It was an uneventful week in Spain as the 10-year note yield was lower by -3bps to finish the week at 5.76%. The Spanish 10-year has now fallen -199bps since late July. The Italian 10-year note ended the week +3bps higher to close at 5.05%. During the week, the note was as low as 4.92%.

The situation in Greece continues to improve. Their 10-year note yield continued its recent trend lower, falling by another -86bps to drop back into the teens at 19.93%. We are now back to yields last seen in late March. Reversing is recent trend, the Portuguese 10-year note backed up +49bps to settle at 8.58%. The yield on this note was higher by +300bps (11.58%) as recently as late July.

Corporate bond issuance continues unabated. Both absolute and relative yields continue be at or near all-time lows. Novartis led the way this week with a $2 billion two-tranche transaction comprised of $1.5 billion of a 10-year note and $500 million of a 30-year bond. In this low interest rate environment, it makes perfect sense that we continue to see borrowers issuing debt on the longer-end of the maturity curve. Vodafone was active with its own $2 billion two-tier deal consisting of $1 billion each of a 5-year and 10-year piece. Ford was also in the market with $1 billion of a 10-year note.

As we come into quarter-end, we may see a bit of window-dressing as investment managers adjust their portfolios. Then it’s off to the beginning of the fourth quarter, which could end up being quite exciting on both the economic as well as political markets.

This Week in Corporate Finance (09/14/12)

The week here in Washington, D.C. started with a burst of excitement as our rookie quarterback, RG III, lead the Redskins to victory in New Orleans, but it was the Fed’s announcement of QE III, that truly took the market by storm. The news that the Fed would be purchasing $85 billion/month of fixed-rate securities on an open-ended basis, and that they would be targeting interest rates to be exceptionally low into 2015, gave a shot of adrenalin to the equity and commodity markets, while making longer-dated fixed-income securities less attractive. This may be the sea-change moment we have been waiting for to really get the US economy moving. Only time will tell if this is true.

For the week, the US 2-year Treasury note yield was unchanged at 25bps (the announcement of ultra-low yields until 2015, has put a ceiling on this maturity); the 5-year note was up +7bps to 71bps (up +12bps in the past two weeks); the 10-year note was up +20bps to 1.86% (up +31bps in the past two weeks); and the 30-year bond was up +27bps to 3.09% (up +42bps in the past two weeks and the highest level since May). The 2-year/30-year curve steepened by +27bps to stand at 284bps (wider by +39bps in the past two week).

It was a similar story in Germany this week, as investors moved out of safety in search of yield. The German 30-year Bund yield was up +20bps to 2.54% (its highest level since March); the 10-year Bund was up +19bps to 1.71%; and the 2-year Bund was up +6bps to 10bps. The French 10-year note was relatively quiet, with its yield only up +5bps to 2.26%. With a current pick-up of +55bps between the German and French ten-year notes, money shifted from Germany to France this week.

The Italian 10-year note yield broke through the 5% barrier, to fall as low as 4.95% (its lowest level since March) only to sell-off at bit to finish the week at 5.02% (-4bps for the week). There was a bit of unease about the situation in Spain towards the end of the week, and their 10-year note settled at 5.79% (up +16bps). The Greek 10-year note continued its recent rally as its yield fell another -83bps to finish the week at 20.79%. The Portuguese 10-year note was practically unchanged at 8.09%.

It was another busy week for corporate debt issuers. Walgreens was in the van this week with their $4 billion five-tranche transaction. The deal was comprised of $550 million of an 18-month FRN, $750 million of a 2.5 year note, $1 billion of a 5-year note, $1.2 billion of a 10-year note, and $500 million of a 30-year bond. Also in the market this week was Merck with a $2.5 billion offering made-up of $1 billion each of a 5.5-year and a 10-year note and $500 million of a 30-year bond.  

The US equity markets responded to the news of QE III by soaring to multi-year highs. The Dow closed the week at 13,593.37 and the S&P 500 settled at 1,465.77, both the highest levels since December 2007. The NASDAQ finished the week at 3,183.95, its highest level since November 2000 (think Creed’s “With Arms Wide Open”).

We will be watching to see if the markets can maintain their positive momentum in the second half of September.

This Week in Corporate Finance (09/07/12)

 Welcome to September 2012 and a continuation of our very orderly and polite financial markets. This is quite a change from the September we experienced only four years ago back in 2008. We really had the feeling we might be off to the races before the release of the monthly Employment Report, as we were riding some reasonably good news out of Europe. The weaker than expected Employment Report (+96K versus consensus of +125K) took a bit of wind out of the market’s sails, but net-net it was positive week.

For the week, the US 2-year Treasury note yield was up 3bps to 25bps; the 5-year note was up 5bps to 64bps; the 10-year note was up 11bps to 1.66%; and the 30-year bond was up 15bps to 2.82%. The 2-year/30-year curve steepened by 12bps to now stand at 257bps.

With the news of the ECB potentially buying more sovereign debt, investors moved from ultra-safe names to add a bit more yield to their portfolios. The German 30-year Bund was off +22bps to close at 2.34% (the highest yield since early May); the 10-year Bund was +19bps higher to settle at 1.52%; and the 2-year Bund was +7bps higher to close at positive 3bps, the first time it has finished a week with a greater-than zero yield since early July. The French 10-year Oat was of by +5bps to close at 2.21%.

Spain and Italy were beneficiaries of the ECB’s largesse. Spain’s 10-year note yield fell an incredible -123bps, crashing through six percent to settle at 5.63% (its lowest close since early May). A week ago, we were worrying once again if Spain would be trending back north of seven percent, what a difference a week can make. In Italy, their 10-year note yield fell -79bps to 5.06% (its lowest level since late March).

The Greek 10-year note fell -179bps to 21.62% (its lowest level since early May). In Portugal, their 10-year yield dropped -121bps to 8.10%. One has to go back to March 2011 to find yields this low.

Will the latest action by the ECB be the mythical silver bullet that will finally put the Europe economy on the path to recovery? Only time will tell, but so far the market seems to believe so.

On the Corporate front, debt issuance was quite brisk as we came out of the normal pre-Labor Day quiet period. Adding a bit of fuel to the fire was the fact that corporate yields, on an absolute basis, touched an all-time low this week of 3.84%. A number of issuers stepped up to the plate to take advantage.

Leading the charge was WellPoint with their $3.25 billion four-tranche deal. It was comprised of $625 million of both a 3-year and 5-year note and $1 billion each of a 10-year note and a 30-year bond. Deere raised $1 billion with the issuance of a two-part transaction made up of $500 million of both a 3-year and 5-year note.

The market will be watching for news out of the Fed with the conclusion of the FOMC meeting on Wednesday. Is the US economy so weak that the Fed will announce new simulative measures to kick-start it?

Stay tuned