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The Resource for the Global Finance Profession

This Week in Corporate Finance: Still No Solution in Europe

  • By Brian Kalish
  • Published: 2011-12-19

This article was excerpted from the latest issue of EconWatch, a summary of the latest economic data releases from the previous week.     

Read the full report.  

As we wind down the year, the story we heard this week was very similar to the story we have been hearing for the past several weeks now: Europe is in crisis, China seems to be slowing down, and the U.S. economy seems to be on an upward trajectory with reasonable optimism for 2012.

Last week’s European Summit failed to soothe the concerns of the investing world that a solution to the current crisis is anywhere in sight. We witnessed a fair bit of volatility in Sovereign debt yields during the week, with yields reaching their crescendo mid-week, before easing off a bit by week’s end. For Italy, their 10-year bond reached 6.89 percent before pulling back to 6.59 percent; the Spanish 10-year peaked at 6.07 percent before closing at 5.31 percent; and the Belgian 10-year climbed to 4.67 percent before settling at 4.30 percent.

Germany continues to be a safe-haven for not only European investors, but investors around the world as well. The German two-year note now trades at 21bps, which is the all-time low yield for this security and is actually 2bps through the U.S. two-year. With the German two-year at 21bps, the market is pricing in the ECB to lower their benchmark rate to the Fed’s zero-to-25bps range in the next 12 months. We shall have to wait and see if this comes to pass.

The German 10-year note rallied all week long, closing at 1.85 percent, which is fairly close to its all-time low yield of 1.67 percent, reached back on November 10th. The German 30-year bond fell to its all-time low yield this week of 2.35 percent, before bouncing up slightly to 2.37 percent.

And then there is Greece. Greek debt hit new all-time high yields across the entire length of the maturity curve. The Greek one-year note touched 366.30 percent before falling to 328.68 percent; the two-year note soared to 156.60 percent before closing at 146.82 percent; and the 10-year bond reached 35.86 percent before settling at 34.62 percent.

The Euro itself was in the news quite a bit this week as it fell to an 11-month low of $1.2946, its lowest level since January 11th. One of the curious developments throughout the European crisis has been the strength of the Euro. After touching a post-Lehman low of $1.1922 back on June 8, 2010, the Euro has pretty much traded north of $1.30. Might this recent dip be a harbinger of the Euro retreating back to its introductory level of $1.19? Only time will tell.

As the week progressed, we saw an accelerating flight-to-safety trade in U.S. Treasuries. With the Fed’s non-announcement announcement after Tuesday’s FOMC meeting, the benign reports on inflation, and the growing disenchantment with Europe, Treasury yields dropped. For the week, the two-year note was down up 1bp to 23bps; the five-year note was down 9bps to 80bps; the 10-year note was down 21bps 1.85 percent; and the 30-year bond was down 26bps to 2.85 percent.

Pressure keeps building in the short-end of the curve with the three-month LIBOR continuing to creep higher and higher. This week, the three-month LIBOR closed at 56.32bps, its highest level since July 2009.
The chances for the markets to see additional volatility over the next two weeks remain relatively high given the uncertainty of the markets, the increased possibility of headlines risk, and the fact many market participants will be away from their trading floors and trying to enjoy a bit of holiday cheer.

Be careful out there.

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