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This Week in Corporate Finance: Flight to Quality Continues

  • By Brian Kalish
  • Published: 8/18/2014

This article was excerpted from the latest edition of EconWatch. Read the full newsletter.

Welcome to August, usually an uneventful time of the year, but in our current “Black Swan Times”, anything and everything can happen. While we are dealing with unrest in Gaza and Ukraine, bond defaults in Argentina, and challenging times in places like Missouri, the market continues to behave in an orderly manner.

In the U.S. Treasury market over the past two weeks, the two-year yield is down 7bps to 40bps (after being as low as 39bps); the five-year note yield is down 15bps to 1.52 percent (after being as low as 1.51 percent); the 10-year note yield is down 15bps to 2.33 percent (after being as low as 2.32 percent, its lowest level since June 2013); and the 30-year bond yield is down 16bps to 3.12 percent (after being 3.11 percent, which was its lowest level since May 2013).

What has caused this flight-to-quality? It is twofold: (1) plain old uncertainty due to geopolitical concerns, and (2) the hoped-for economic expansion (both here and abroad) that has failed to materialize. The U.S. economy continues to grow and create jobs, but at a slower pace than wished for. In other parts of the world, economies are either barely growing or are actually shrinking. Given the slower-than-previously expected growth, the market is pushing back its forecast for when countries like the United States and the United Kingdom might begin to raise interest rates.

Interest rates in Europe continue to fall to new all-time lows. In Germany, the 10-year Bund yield broke through the 1.00 percent barrier to fall to 95bps (UST 10-year less 138bps), while the German two-year note fell under 0.00 percent to actually touch negative -1bp (the all-time low was negative -9.6bps back in July 2012). Germany now joins an exclusive club of countries that have 10-year bonds yielding less than 1.00 percent (the other members are Switzerland and Japan).

The French 10-year note yield fell to an all-time low of 1.34 percent (UST 10-year less 99bps); the Spanish 10-year yield dropped to its all-time low of 2.40 percent (UST 10-year plus 7bps); and the Italian 10-year note yield tumbled to its all-time low of 2.58 percent (UST 10-year plus 15bps).

With this backdrop, it is not surprising that corporate bond issuance has gotten off to a slow start in August (it actually has been the slowest start to a month since July 2013). Despite this sluggish start, a couple of marquee deals have been executed. CBS Corp issued $1.75 billion in a three-tranche offering, comprised of $600 million of a five-year note, $600 million of a 10-year note, and $550 million of a 30-year bond. Motorola Solutions came to market with its own $1.4 billion three-part transaction. Their deal consisted of $400 million of a seven-year note, $600 of a 10-year note, and $400 million of a 30-year bond.

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