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.

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

 At press time, we continue to sit upon the precipice of the “Fiscal Cliff” with echoes of Europe’s 1986 hit “The Final Countdown” droning on in the background. The government of the United States seems wholly incapable of steering the ship of state away from a Titanic-like disaster and we will just have to wait-and-see if there will be a last minute solution. We have no idea how the world’s financial markets will react on Wednesday morning if no agreement is reached by the time the Times Square Ball touches down on New Year’s morning.

With the uncertainty as to what will transpire between now and the end of the year, investors moved towards safety at the expense of yield. For the week, the US 2-year note yield was down -2bps to 25bps; the 5-year note yield was down -5bps to 71bps; the 10-year note yield was down -7bps to 1.70%; and the 30-year bond yield was down -7bps to 2.87%. The 4-week T-bill yield fell as low as negative -4.5bps (its lowest level since December 2008), before ending the week at 0.00%. With the expected expiration of the TAG program, the market will be watching closely to see if there is a significant migration of cash away from bank deposits and into other money-market products. Depending on the degree of the migration, interest rates on the front-end of the money-market curve could stay in negative territory for the foreseeable future.

It was a similar story in Germany, as safety trumped return. The 30-year Bund yield fell -7bps to 1.31%, the 10-year Bund dropped -8bps to 2.17%, and the 2-year Bund was unchanged at negative -1bp. The 10-year French Oat had a quiet week, up +1bp to 1.995%.

It was a quiet week across the rest of Europe as well. The Italian 10-year note was a touch weaker with its yield rising +2bps to 4.497%, the Spanish 10-year note was unchanged at 5.255%, the Portuguese 10-year note was unchanged at 7.01%, and the Greek 10-year note yield was off slightly, +1bp to 11.90%.

Corporate bond issuance is now pretty much shut down for the rest of the year, after having set a global issuance record of $3.94 trillion. Borrowing costs touched an all-time low this week of 3.27%.

While political news continues to grab all the headlines, we do have the always-important Employment report coming out this Friday. Consensus is looking for Payrolls to increase by +157k and for the Unemployment rate to creep up +0.1% to 7.8%. The next FOMC meeting is scheduled for January 29^th – 30^th.

Have a wonderful New Year!

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

 The Federal Reserve couldn’t have been any more clear this week as to what signposts they will be following to help them determine when is the appropriate time to apply the brakes to the US economy. At the conclusion of this last scheduled FOMC meeting of 2012, the Fed took the extraordinary act of declaring that until the Unemployment rate drops to 6.5% AND the Inflation rate increases to at least 2.5%, the Fed will take no action to slow the economy down. I think it’s important to remember that this will still be a guideline rather than a strict formula. If the Fed starts to see yellow lights flashing on their economic dashboard of KPI’s, they will take whatever action they believe is appropriate.

In addition to this new explicit framework, the Fed announced an expansion of their current QE3 strategy (or the start of QE4, depending on your point of view), starting the first of the year. The Fed will begin to purchase $45 billion of Treasuries, in addition to the $40 billion of mortgage debt they are currently purchasing on a monthly basis. As 2012 winds down, so too will Operation Twist, a $667 billion program where the Fed purchased longer-dated Treasuries and sold shorter-dated ones.

Between the news of the Fed potentially stoking future inflation and no progress being made on the “Fiscal Cliff” front, US Treasuries stumbled a bit this week. For the week, the 2-year note yield was down -1bp to 23bps (we’re not expecting the 2-year yield to vary much over the next three years); the 5-year note yield was up +7bps to 69bps; the 10-year note yield was up +8bps to 1.70% (after being as high as 1.75%); and the 30-year bond yield was up +6bps to 2.87% (after being as high as 2.93%).

The 4-week T-bill yield actually fell into negative territory, for the first time since January, as investors may be moving money out of bank deposits and into short-dated Treasury bills via outright purchases, Repo and money-market funds. With no news out of Washington that the TAG program will be extended past its current expiration date of December 31^st, investors may be concerned about their potential counterparty risk exposure.

It was a relatively quiet week in Germany. The 30-year Bund yield was unchanged at 2.24%, the 10-year Bund yield sold-off +5bps to close the week at 1.35%; and the 2-year Bund moved closer to yield zero percent, as it settled the week +4bps higher, but still in negative territory yielding -4bps. It was a similar story in France as their 10-year Oat was +2bps higher but still under two percent at 1.98%.

It was a slower week in the corporate bond market as a historic year finishes up with just two major deals to report on. Crown Castle International raised $1.5 billion in a two-tranche offering consisting of $500 million of a 5-year note and $1 billion of a 10-year note. Harbinger Group issued $700 million of a note due in July 2019.

Our thoughts and prayers go out to the victims and families of the tragic event in Connecticut.

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.