By Benjamin Streed
January 7, 2013
The recent catalyst in the bond market has been the Federal Open Market Committee’s (FOMC) latest set of minutes prepared during their meeting back in mid-December. While the status quo of maintaining what they call “accommodative” monetary policy remains intact, we are beginning to see the first appearance of some hesitance at allowing the Fed’s balance sheet, which now sits at over $2.3 trillion, to continue to swell. Just recently, the group chose to alter is communication and economic-targeting methods by implementing what is known as the “Evans rule”, whereby the committee will focus on quantitative metrics such as inflation (2.5%) and unemployment (6.5%) directly rather than focusing on nominal amounts of asset purchases. For the first time since the Fed began its unprecedented balance sheet expansion with their so-called Quantitative Easing (QE) programs, it appears that several voting members of the FOMC’s board feel that it is now appropriate to change course. In fact, several voiced their concern over the Fed’s rapidly growing balance sheet and the risk it poses to the general economy, concluding that they should slow the purchasing of Treasury and mortgage-backed securities well before the end of 2013. Interestingly, one member stuck his/her head out and took the dissent one step further by taking the stance that the committee should end these “unwarranted” purchases immediately. Surprisingly, the emergence of such dissent is a bit curious; doves, those that prefer more action and greater communication, have been begging for the implementation of the Evans rule and just as they received their wish the very first announcement was tempered with hawkish tones. Since the release on January 3rd, 10-year Treasury yields have spiked nearly 7bp to roughly 1.89% as of Friday’s close, marking its highest closing levels since early last May.
On the corporate bond front, the amount of corporate credit coming due this year in the U.S. will fall nearly 28%. This comes on the heels of last year’s new issuance hitting a record $1.5 trillion which included $1.1 trillion of high-grade debt. U.S. issuers have $449 billion of bonds/loans set to mature in 2013, significantly down from the $620 billion due in 2012 thanks in part to the fact that many corporations have already funded themselves with cheap money thanks to ongoing low interest rates. Who can blame them for taking advantage of the low-cost of borrowing? According to YieldBook data, the average yield on investment-grade corporate bonds fell to a record low of 2.65% on December 6th after having been as high as 3.70% at the start of the year. General Electric is set to lead the way with $40 billion due this year, followed by Citigroup with $24 billion. For comparison, GE faced $78 billion of redemptions in 2012 while Citigroup saw over $60 billion. The declining balance of maturities will continue into 2014 and 2015 with only $484 and $495 billion scheduled, which could hamper the refinancing demands of borrowers for the next couple of years.