Two Sides of a Coin
February 06, 2012
The beginning of last week appeared to be yet another one dictated by a “risk off” mentality, and thus, lower yields on U.S. Treasuries. In fact, going into Friday Treasury yields were down considerably with longer-dated maturities showing the bulk of gains; the 5-year was off 4bp (0.70%) hitting record low yields nearly every day, the 10-year was off 7bp (1.82%) and the 30-year bond was off 5bp (3.00%). A combination of worries weighed on the markets ranging from the underwhelming U.S economic data and the Fed’s recent testimony, to ongoing concerns in the Euro zone over a potential solution to the ongoing Greek debt drama. Friday, the world was turned on its head after strong job-creation data in the U.S. surprised global markets and fueled a reverse from “risk off” to “risk on”. As previously noted, yields were down going into the 8:30am release on Friday, but soon afterward everything changed. The pronounced selloff in Treasuries on Friday pulled yields across the curve into positive territory for the week; the 5-year finished up 2bp (0.76%), the 10-year was up 3bp (1.922%) and the 30-year gained 6bp (3.11%). The chart below details the change in basis points for each benchmark Treasury going through the week. Changes in yield were all negative through Thursday, but notice the spike Friday morning that sent yields up for the week. Corporate bond yields are taking their cue from the Treasury markets as yields approach lows not seen since late 2010. According to the Citigroup Broad Investment Grade index (Citi BIG), corporate yields hit 3.31% last week, its lowest level in over two years. Going into this week, eyes will remain on the Euro zone and its ability to provide a solution to the ongoing debt crisis. The markets continue to walk on a thin wire and it remains to be seen whether the markets will continue with a “risk on” mentality with higher yields, or whether it will pull yields back down and revert to “risk off”.
Corporate Bonds Stage a Comeback
According to Bloomberg data, corporate issuers continue to take advantage of near record-low interest rates as they issued nearly $70 billion in new debt last week. Despite last week’s strong showing, January’s total issuance of $336 billion was the slowest start to a year since 2008. Corporate issuance is staging a comeback after Fed Chairman Ben Bernanke pledged to keep interest rates low through at least 2014 and it appears that we may see some sort of resolution to the ongoing Greek debt crisis. The Fed’s pledge led to a general rally in the “belly” of the yield curve, with 5 and 10-year maturities seeing the bulk of gains. International Business Machines (IBM), McDonald’s and Procter & Gamble (P&G) helped spur a 75% increase in issuance last week with each obtaining record-low interest rates for various maturities. P&G issued $1 billion of 10-year notes, paying a record-low coupon of 2.30% for that maturity while IBM was able to sell $1.5 billion of notes due in 3-years at a record low 0.55%. McDonald’s chose to move further out on the yield curve, issuing $500 million of new 30-year bonds at an all-time low of 3.70%. With intermediate-term rates being the focus of the Fed’s actions, it would seem likely that corporate issuers would focus their attention on this portion of the yield curve. Interestingly, the general “risk on” trade in the markets over the last month pushed longer-term rates down as well, helping to entice many corporate borrowers into the market. Issuance of corporate bonds that mature in more than 15 years was up 64% in January. This compares to a monthly average of only $8.3 billion for all of 2011.
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