Raymond James Update: Beige Book Recap and an FOMC Preview

Raymond James Bond Market CommentaryAn August Month
By Benjamin Streed
September 4, 2012

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.

The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.

To learn more about the risks and rewards of investing in fixed income, please access the Securities Industry and Financial Markets Association’s “Learn More” section ofinvestinginbonds.com, FINRA’s “Smart Bond Investing” section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) “Education Center” section of emma.msrb.org.

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