The release of the Fed’s Beige Book on Wednesday highlighted that the economy grew “gradually” in July and August as a slight improvement in housing and retail sales helped offset weaker manufacturing activity. The 12 regional banks that make up the Federal Reserve system mostly noted that employment was “holding steady or growing only slightly” which was a bit disappointing to the markets. The importance of the Beige Book lies in the chosen language and the way this data is presented to the public. As the Federal Open Market Committee (FOMC) remains data-dependent before any further quantitative easing (QE), noting that employment remains weak is a potential indicator that policy makers may need to implement further monetary measures to help stimulate economic growth thereby aiding the employment situation. FOMC members will meet next on September 12th – 13th and indicated in their last meeting that further action would likely be needed “fairly soon” should we continue to lack “substantial and sustainable” improvement in the general economy. As noted, this news arrived on Wednesday and was received with little fan-fare, up until mid-morning on Friday when the market abruptly revered-course despite no new economic news or relevant headlines. Depending on your view, it was either surprising or completely expected that Wednesday’s language eventually sparked the markets to anticipate further QE measures by Chairman Bernanke. For reference, as of the close on Thursday yields were relatively little-changed with benchmark 5 and 10-year notes falling 4.3bp and 6.3bp respectively. Friday accelerated the week’s trend and by the time everyone went home for the Labor Day holiday the 5-yr had fallen an additional 7.3bp to finish the week down 11.6bp while the 10-year yield declined by 7.5bp to finish the week down 13.8bp.
Looking back on August, it was a record-breaking month for domestic corporate bond issuance despite the month’s prevailing rise in yields. According to Bloomberg data, $230.2 billion in new issuance occurred last month around the globe, which is only exceeded by the amount raised back in August of 2010 in which $235.3 billion was issued. U.S. corporate issuance totaled $98.5 billion, up from $53.1 billion this time last year but just off its all-time high of $104.3 billion from August 2010. The optimism surrounding new issuance comes from three sources: first, optimism is rising out of Europe that it may be able to contain its ongoing financial crisis should the European Central Bank (ECB) begin to buy sovereign debt and bring down yields; second, corporate issuers remain active due to the underlying Treasury yields which remain just off of their recent all-time low levels; lastly, credit-default swap spreads sit near their lowest levels this year with the 5-year Markit CDX index currently at 101.9bp, well of its YTD high of nearly 130bp set back in June.
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