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This Week in Corporate Finance: Will They or Won't They?

  • By Brian Kalish
  • Published: 2011-10-24

We have spent most of this week wondering the “will they/will they not?” question when it comes to Europe. Hopefully we will gain some insight and clarity when European leaders meet multiple times over the next couple of days. The market has been rather range-locked of late, being up when we have hope for a solution to the European problem, and down when we have felt there was no change for the foreseeable future. Ambiguity about whether the economies around the world are slowing down or speeding up continues to impede the development of a general consensus.

The size of the European Financial Stability Facility (EFSF) has garnered much of the attention this week. Will the EFSF grow from its current size of 440 billion Euro to a much larger 2 trillion Euro structure? Will the EFSF be merged with the European Stability Mechanism (ESM)? Currently, Germany and France are debating among alternative structures and the size of these structures to implement.

Here in the U.S., Treasury yields were rather stable, at least by recent standards. For the week, the two-year note was up 1bp to 27bps; the five-year note was down 5bps to 1.06 percent; the 10-year note was down 3bps to 2.21 percent; and the 30-year bond was up 4bps to 3.26 percent. For the 31st consecutive day, the three-month LIBOR rate rose, settling at 41.8bps, the highest it has been since August 2010.

Bond yields in Greece continue to float in the stratosphere, yet the markets remain orderly. The one-year note hit a new all-time yield of 189.87 percent (don’t I report this every week?!), the two-year note crept up to 79.01 percent, and the 10-year bond rose to 24.67 percent.

Also in Europe, there are growing concerns that France may not be able to maintain its “AAA” rating. The spread between the U.S. 10-year note and the French 10-year note widened to 99bps, the widest since March 2009, while the spread between German and French 10-years is at its all-time wide.

For the 14th consecutive week, the Commercial Paper (CP) market shrank. This week, it was a drop of -$17.0 billion bringing the total amount of CP outstanding down to $949.3 billion, the smallest the market has been since January. The ABCP shrank for the tenth straight week, dropping -$1.8 billion to $304.1 billion.

With all the uncertainty in the market, it wasn’t terribly surprising that we witnessed the second slowest week of the year in bond issuance. It was even slower in the high-yield arena with no issuance this week.
Down under, the Australian government issued its largest public deal ever, A$3.25 billion of a 15-year bond. This was the first time Australia issued a bond with this great a maturity since Prince had a hit with “When Doves Cry” (see 1984). The difference in coupon is quite interesting; in 1984 the coupon was 13.60 percent versus today’s 4.75 percent.

Staying overseas, as expected, Brazil for the second time this year lowered its interest rates to combat a slowing economy. The Central Bank of Brazil lowered its Selic rate by -50bps from 12.00 percent to 11.50 percent.

Europe will continue to dominate the headlines as we wind down the month of October.

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.  

 

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