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Global Capital Markets

Hewlett-Packard Co., the world’s largest personal-computer maker, and energy company Chevron Corp. led $22.6 billion of U.S. corporate bond sales this week, capping a record month for non-financial issuance as investors sought safety in investment-grade company debt. Hewlett-Packard sold $2.8 billion of notes in a three-part sale, and San Ramon, California-based Chevron sold $5 billion of bonds, adding to the $63 billion in non-financial investment- grade offerings this month. That’s a monthly record and more than doubles last year’s $27 billion monthly average.

Fannie Mae’s record $15 billion two-year note sold at 68 basis points over comparable Treasuries.

Roche Holdings AG’s record euro corporate debt offering helped push bond sales in Europe to more than 98 billion euros ($124 billion) this month, the busiest February ever.

Companies issued more than 249 billion euros of bonds this year, almost triple the amount raised in the same period in 2008. January sales set a monthly record. Roche, Switzerland’s biggest drugmaker, issued $16.2 billion of debt in euros and pounds a week after selling a similar amount in the U.S. to fund its hostile $42.1 billion bid for Genentech Inc.

Indonesia, Southeast Asia’s biggest economy, sold $3 billion of bonds in the largest dollar debt fundraising by a developing nation this year after offering more than double the premium over U.S. Treasuries it paid in June. Indonesia sold $2 billion of 10-year notes and $1 billion of five-year notes.

The FDIC’s Temporary Liquidity Guarantee Program has provided financial companies an alternative to selling traditional corporate bonds. Finance companies have issued about $166 billion through the program since it began on Nov. 25.

U.S. Treasuries

Treasury notes rose on Friday, for the first time in four days as the U.S. economy shrank more than forecast and the government broadened its rescue efforts for Citigroup Inc., bolstering the safety appeal of government debt. Bonds rallied even after the U.S. sold a record $94 billion in two-, five- and seven-year notes this week.

The U.S. will probably borrow $2.5 trillion during the fiscal year ending Sept. 30. That’s almost triple the $892 billion in notes and bonds it sold in the prior 12 months.

Commercial Paper Market

For the first time in seven weeks, the commercial paper market expanded this past week. Total outstanding commercial paper increased by $3.2 billion, to $1.524 trillion, for the period ended Wednesday, Feb. 25, according to data from the Federal Reserve Bank. The total commercial paper market is down from $1.82 trillion five months ago and its peak of $2.2 trillion during the summer of 2007.

Money Market Funds

Assets in money-market funds jumped by $29.63 billion in the latest week, as the seven-day simple yield on taxable funds set another record low. For the fifth consecutive week, the seven-day yield came in below 0.5%, a level which hadn’t been breached since 1975. (And we all remember the top hit of that year was The Captain and Tennille’s “Love Will Keep Us Together”.)

Reserve Management Corp. said it will withhold $3.5 billion in its Reserve Primary Fund to cover legal expenses related to the money-market fund’s failure in September.

LIBOR

Overnight Libor surged to near a three-month high as institutions sought funding to cover end-of-month commitments. The rate increased eight basis points to 0.36 percent today, the highest level since Dec. 4, according to the British Bankers’ Association. The three-month rate was little changed at 1.26 percent, the highest level since Jan. 8.

Credit Ratings

Nearly $900 billion in U.S. corporate bonds were downgraded in 2008, representing 24% of the total U.S. bond market. Last year’s volume was the highest percentage of the market ever downgraded, topping the previous mark of 23.4% recorded in 2002, when $558 billion in U.S. corporate bonds were hit with downgrades.

Moody’s Investors Service said it’s reviewing all 2005, 2006 and 2007 subprime-mortgage bonds for credit-rating downgrades, covering debt with $680 billion in original balances.

Banking

The nation’s banks lost $26.2 billion in the last three months of 2008, the first quarterly deficit in 18 years, as the housing and credit crises escalated. The FDIC said Thursday that U.S. banks and thrifts also more than doubled the amount they set aside to cover potential loan losses, to $69.3 billion in the fourth quarter from $32.1 billion a year earlier. Regulators said there were 252 banks in trouble at the end of 2008, up from 171 in the third quarter. For all of last year, the banking industry earned $16.1 billion, the smallest annual profit since 1990. (Remember Bell Biv Devoe’s Poison)

By Brian T. Kalish, Director, Finance Practice

What a difference eight months can make. Back in June 2008, the global economy was worried about the widespread and rapid rise in food price inflation that had caught many analysts and policy makers by surprise. At the time, price movements and dramatic newspaper headlines would certainly seem to have vindicated the commodity bulls. During the prior three months, the agricultural staples of wheat, corn, soybeans, rice and oats had hit all-time highs. In the previous 12 months, the price of rice rose by 118%, wheat by 95%, soybeans by 88%, corn by 66% and cotton and oats by just under 50%.

The world had the feeling that demand was outstripping supply and that we were involved in a new dynamic situation. (See the housing market circa 1999 – 2005).

Oil prices soared to a peak of $147 a barrel last summer. At the time, the talk of oil ever returning to $50 to $60 a barrel, much less $20 to $30 seemed improbable. Some analysts were speaking of a world with oil at $250 a barrel.

We were in a new world where the high cost of oil was increasing the demand for bio-fuels. The demand for bio-fuels was also competing with our demand for foodstuffs. Farmers in the United States where wondering how to invest all their new found profits.

Now let’s look at the current situation. The S&P GSCI^TM (which provides investors with a reliable and publicly available benchmark for investment performance in the commodity markets) lost 8.9% in January for its 7th consecutive monthly decline. After peaking in July 2008 with a +75.98% 12 month gain, the index is currently down              -51.17% from the year prior. Given where prices were in the first half of 2008, this trend will likely continue through the first half of 2009.

Oil currently trades in the mid $30s a barrel. Corn has dropped from $8 a bushel to below $4 a bushel. Soybeans have fallen from $16 a bushel to close to $10 a bushel.

Due to what we’ve seen in these last eight months, you almost have to throw out any previous history because we’re in uncharted territory. We’ve been through a downturn before, but we’ve also never faced the current levels of risk out there.

The demand for corn to produce ethanol has fallen through the floor. The dramatic drop in oil prices has forced a corresponding decline in the price of corn-based ethanol, idling many ethanol plants until their profitability improves and reducing the demand for corn.

When the price of corn soared, farmers planted more corn. The result was the second largest harvest in U.S. history in 2008. Unfortunately for the producers, this near-record output hit the market just as the economies of the U.S. and most of the rest of the world were actually slowing down.

The lesson to be learned for investors, producers and consumers is to prepare for the unexpected. We have moved to a world where the least expected outcome is now the norm. Not anticipating and planning for a possible event because it is 6 standard deviations from the norm is no longer a prudent risk strategy.

By Brian T. Kalish, Director, Finance Practice

The Federal Deposit Insurance Corp. plans to extend a program to temporarily guarantee new senior unsecured bank debt in a bid to spur consumer lending.

The FDIC said it would change its Temporary Liquidity Guarantee Program to insure some assets for 10 years, up from three years. The change will accommodate the longer maturities of covered bonds, the FDIC said. Covered bonds are securities where the issuer remains liable for the notes.

The change, which the FDIC will put into effect this month, is part of a government effort to stabilize the banking system and increase lending.

The FDIC, which insures deposits at U.S. banks, announced the Temporary Liquidity Guarantee Program in October “to strengthen confidence and encourage liquidity in the banking system,” the agency said in a news release at the time.

The agency guarantees senior unsecured debt, such as commercial paper, transfers between banks and corporate bonds with maturities as long as three years, issued through June 30. These financing options help banks fund their operations and let the institutions convert maturing senior debt into new issues backed by the FDIC. Banks have sold about $229 billion in FDIC-backed debt maturing in three years or less.

The 10-year extension applies to debt that is supported by collateral and the issuance should support new consumer lending, the FDIC said.

Covered bonds differ from asset-backed securities in that the collateral backing the debt remains with the issuer, who becomes liable for the notes if the assets aren’t sufficient.

Covered bonds, which date back to 18-century Prussia, are a $3 trillion market that is a primary source of financing for home and public-sector lenders in Europe. They have been issued in the U.S. since 2006, and only by Bank of America and the failed Seattle-based Washington Mutual Inc.

AFP’s website, www.afponline.org, is updated on a very frequent basis (usually several times per day).  Because our site is large, and covers a diverse number of categories, we think it would be beneficial to give a general summary of our website updates right here on this blog.  I will try to publish blog entries detailing the website updates on a weekly basis going forward.

To start things off, here is a summary of the updates that we think our members would be most interested in:

AFP Forums:

- AFP Retail Treasury Forum speakers, agenda, and education updates

- AFP Payments Forum education and agenda updates

- AFP Corporate Risk Forum language and pre- and post-forum seminar updates

Professional Development:

- Webinars added

- New Half-Day seminars added

- “Now That You’re a CTP” page added to the Certification section

Newsletters:

- Brand-new Women in Finance Newsletter launched

- Latest editions of the AFP Payments, Risk!, and Accounting Newsletters added

- December ‘08 / Janaury ‘09 Regulatory and Legislative Update added

AFP Annual Conference:

- New information added to the 2009 AFP Annual Conference section

Sponsors:

- Sponsor listings updated for the AFP Payments and AFP Retail Treasury Forums.

- New Sponsored Whitepaper from PriceWaterHouseCoopers added (Whitepapers are now accessible via the Quick Links menu)