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This Week in Corporate Finance: U.S. Economy Turns the Corner

  • By Brian Kalish, Director, Finance Practice, AFP
  • Published: 7/7/2014
This article appears in the latest edition of AFP EconWatch. Read the full report.
 

The holiday-shortened week (Happy 238th Birthday America) surprised the market to the upside as the biggest news of late reinforced the narrative that the U.S. economy has finally turned the corner and is poised for a healthy expansion. That news, of course, was the monthly employment report with a gain of 288k jobs and the unemployment rate dropping to 6.1 percent from 6.3 percent. The consensus was for a gain of +215k jobs and the rate to be unchanged. The previous two months were also revised to the upside, with April improved to +304k from +282k, and May being upgraded to +224k from +217k. We have now seen five consecutive months of +200k jobs created; and if we are able to maintain this current pace for the rest of 2014, we will have the best year for job creation since 1999.
 
The stock market reacted positively to this news, reaching new all-time and multi-year highs. The Dow soared past 17k, to peak at a new all-time high of 17,074.65 (up 13.88 percent over the past year); the S&P 500, while not quite able to break through the 2000 level, managed to reach a new all-time high of 1,985.59 (up 22.91 percent over the past 12 months); and the NASDAQ climbed to a new 14-year high of 4,485.93 (up 30.27 percent over the past year). In Germany, the DAX continues to trade near its all-time high, currently at 10,029.43 (up 28.10 percent over the past year).
 
Given this news of an improving economy, the U.S. Treasury market is a bit weaker, but the response has been rather muted. Over the past two weeks, the two-year yield is up +5bps to 51bps (it was as high as 52bps, its highest level since September); the five-year note yield is up +5bps to 1.74 percent (after being as high as 1.76 percent); the 10-year note yield is up +2bps to 2.64 percent (after being as high as 2.69 percent), and the 30-year bond yield is up +2bps to 3.47 percent (after being as high as 3.50 percent). With interest rates expected to rise here in the U.S. and remain depressed in Germany, the spread between 10-year notes and bunds reached its widest point since June 1999 (think Ricky Martin’s “Livin’ la Vida Loca”) at 135bps.
 
Corporate bond issuers continue to take advantage of historically low interest rates and tight credit spreads. Corporate credit spreads are now at their tightest levels since October 2007. In this issuer-friendly environment, it is no surprise that we have just experienced the most robust half-year for corporate debt issuance ever. At $2.29 trillion, the first half of 2014 beat out the previous record-holder 2009.

Helping to set the record was the recent Oracle $10 billion seven-tranche offering. It was comprised of $1 billion of a three-year FRN, $750 million of a five-year FRN, $2.0 billion of a five-year note, $1.5 billion of a seven-year note, $2.0 billion of a 10-year note, $1.75 billion of a 20-year bond, and $1 billion of a 30-year bond. The Oracle deal was the second-largest transaction of 2014, second only to Apple’s $12 billion offering back in April.
 
With a stronger U.S. economy, the market is beginning to price in a scenario where the Fed starts to raise interest rates earlier than previously thought. Most observers are expecting a Fed move sometime mid-year 2015, but after the recent employment report, some are now targeting March as the beginning of a tightening cycle.
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