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Articles

This Week in Corporate Finance: Too Big to Rescue?

  • By Brian Kalish
  • Published: 11/14/2011

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.


To paraphrase the great Yogi Berra, “it’s déjà vu all over again” when it comes to Europe. What a fascinating week we experienced. The markets, having survived last week’s brush with death in regard to Greece, were roiled again this week in response to the news out of Italy. The great apprehension with Italy is the fear it is TBTR (Too Big to Rescue). Italy is the third largest economy in Europe, and unlike Greece, Ireland, and Portugal, a default or restructuring of Italian debt could be too much for the rest of Europe (basically France and Germany) to handle.

During the week, we witnessed Italian yields rise significantly. The Italian two-year note yield rose as high as a record 7.47 percent before dropping to a still-elevated 5.69 percent, while the 10-year bond yield hit a record 7.48 percent before slipping down a bit to 6.45 percent. Italy crossing the seven-handle with regard to its bond yields is significant because this had been the previous line-in-the-sand where Greece, Ireland and Portugal needed to engage outside support.

By week’s end, Italy’s position seemed to be on firmer ground. However, the same could not be said for our friends in Greece, where it was another week of record-breaking yields (or near so). The Greek one-year note yield settled at the near-record high of 249.20 percent (the record yield being 250.37 percent), their two-year note touched a record-high yield of 110.80 percent, and the 10-year bond yield ended up at a record-high 28.45 percent.

Though U.S. Treasuries were sought out during the darkest moments of the week, net-net, Treasuries ended up relatively unchanged on the week. The two-year note was up 1bp to 23bps; the five-year note was up 3bps to 91bps; the 10-year note was up 2bps to 2.06 percent (after being as low as 1.93 percent); and the 30-year bond was up 2bps to 3.11 percent.

Keeping Treasury yields from dropping lower were reports of an improving U.S. economy. For example, this week’s Initial Unemployment Claims report came in at +390k, the lowest reading since April. We shall see if these green sprouts of optimism grow into something more substantial.

On the short-end of the yield curve, three-month LIBOR was up for the ninth consecutive day as the rate touched 45.72bps, the highest it has been since July 2010. The basis difference between credit risk and government risk is beginning to show itself again, as the TED spread hit its highest level since June 2010 at 44.92bps and the LIBOR-OIS spread reached the widest it has been since July 2009, touching 36.42bps.

Given all the volatility of the markets this week, it is interesting to report that this was the busiest week for bond issuance since May. Amgen came to market with a $6 billion, four-tranche deal which was the largest transaction since Verizon issued $6.25 billion of debt back in March. The Amgen deal was comprised of $1 billion each of three-year and five-year notes, $1.75 billion of 10-year notes and $2.25 billion of 30-year bonds. Also in the market was Peabody Energy with a two-part $3.1 billion deal, comprised of $1.6 billion of seven-year notes and $1.5 billion of 10-year notes.

The overall Commercial Paper (CP) market shrank a bit this week after growing last week. The CP market contracted by -$12 billion bring the total outstanding to $967.7 billion. This is the sixth consecutive week the total outstanding has been less than $1 trillion. The ABCP market grew for the second consecutive week by +$5.7 billion to bring the total outstanding to $321.1 billion.

We will continue to monitor the situation in Europe as the month progresses.

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