AFP Blogs

Whether you’re a fan of Chubby Checker (The Twist and Let’s Twist Again), Dire Straits (Twisting by the Pool), or The Beetles (Twist and Shout), this week the Twist received more attention and air-play than any other time since 1961. The Fed’s announcement that it would be putting on a flattening trade (The Twist – selling short-date securities and buying longer-dated securities), as well as presenting a gloomier-than-expected economic forecast, was the impetus for a huge flight-to-quality, flight-to-the-US and flight-to-the-long-end-of-the-curve trade.

The market pretty much sold everything that wasn’t a long-dated US Treasury (equities, gold, oil, credit). For the week, the 2-year note was up 4bps to 21bps (after touching its all-time low yield of 14.31bps); the 5-year note was down 7bps to 86bps (after touching the all-time low of 77bps); the 10-year note was down 26bps to 1.81% (having touched its all-time low of 1.70%); and the 30-year bond was down an incredible 47bps to 2.87% (having dropped as low as 2.78% – levels we haven’t seen since late 2008/early 2009). 

On the shorter-end of the curve, 3-month Dollar LIBOR has been up for eleven consecutive days, reaching 36.02bps, the highest level since August 2010; and the TED spread has widened to 36.2bps, its widest since July 2010. In addition, the Euribor-OIS spread is at 89bps, its highest level since March 2009.

The US dollar (USD) strengthened this week against most other currencies. The USD reached $1.3385 versus the Euro (the strongest the USD has been since January), and the Dollar Index traded as high as 78.798, its highest level since February. 

Germany also experienced a flight-to-quality, as its government securities were also viewed as a safe haven. Hitting new record low yields were the German 2-year note at 32bps, the 10-year note at 1.64% and their 30-year bond at 2.42%.  

This was a week where the bad news far outweighed the good. The word “recession” entered back into our lexicon. Credit downgrades came fast and furious as the government of Italy joined Bank of America, Wells Fargo, and Citibank on the list of the recently downgraded. On the bright side, S&P raised the credit rating of Turkey’s local currency debt to investment grade at BBB-.

Commodity prices took quite a tumble this week as concerns about a global economic slowdown continued to grow. Copper traded as low as $3.215/lb, which is off -31% since its recent high in February. Gold has traded as low as $1,631.70/oz, and while still up over the past twelve months, the price is down -15% over the past two weeks. The price of oil dropped as low as $77.55/barrel, slightly higher than its 52-week low of $76.61/barrel and off   -33% from its May high.

It wasn’t all gloom and doom. The European corporate bond market saw its busiest day since January 2010 on Wednesday, with issuers such as Imperial Tobacco and RCI bringing $4.6 billion to market.

As we head towards the end of the third quarter, we may witness a bit of window dressing as investors spruce up their portfolios.

Welcome to the wrap-up for a holiday-shortened week. While the big headline of the week was probably S&P moving the credit outlook of the United States from stable to negative, the market pretty much shrugged its shoulders and said “so what”.

For the week, US Treasuries were pretty much unchanged. Concerns about slower economic growth, the ongoing financial crisis in Europe, and only three and a half days of trading, pretty much kept a lid on yields. The 2-year note yield was down 3bps to 66bps; the 5-year note yield was down 1bp to 2.11%; the 10-year note yield was unchanged at 3.40%; and the 30-year bond yield was up 1bp to 4.47%.

The situation in Europe continues to deteriorate. A restructuring of Greece’s debt seems to be merely a matter of when rather than if. The Greek 10-year bond touched a record high yield of 14.95%, while the 2-year note rose to a record yield of 23.33%. Yes, a 23-handle on a two-year piece of debt denominated in Euros! Greek CDS widened to a record 1340 bps and the spread to German bunds reached a record wide spread of 1145bps.

Portugal and Ireland (our next two favorite PIGS) fared poorly this week as well. Portuguese 10-year bonds are now yielding 9.43%, while their 2-year notes are yielding 10.85%. Portuguese CDS are currently trading at 662bps. Irish 10-year bonds are at 10.48% with 2-year notes trading at 10.77% and the Irish CDS spread is at 663bps.

The world will to continue to monitor the situation in Europe, with the fear being that a default on the part of Greece or another of the weaker states could cause a Credit-Anstalt moment in the world financial markets.

Next week, the FOMC will meet for the third time this year. While no one believes the Fed will tighten the Fed Funds rate at this meeting, it should be newsworthy, if for no other reason than this will be the first time the Fed will hold a press conference following the release of its monetary policy statement.

While the next Payroll report isn’t until Friday May 6^th, we do continue to see flickers of hope coming from the weekly Jobless Claims report. Both the current week and the four-week moving average are hovering around the 400k level. While both numbers really need to drop to the 350k level to boost overall employment, the fact that the four-week average has been less than 400k for eight straight weeks is a “good” thing.

The Commercial Paper (CP) market, like the Treasury market, was relatively unchanged for the week. The gross outstanding of CP shrank slightly, down $800 million to $1.098 trillion. ABCP grew by $5.1 billion to $357.3 billion outstanding. 

Equities and commodities were up again this week. The Dow Jones closed at 12,505.99 which is the highest close in 34 months. Gold reached a new all-time record high price of $1512.47/oz, silver hit another 31-year high of $46.86/oz, and oil closed the week at $112.29/barrel.

In other world events, Sweden’s Riksbank (the world’s oldest central bank, founded in 1668) raised its benchmark rate for the sixth time since July to combat inflation. Their repo rate now stands at 1.75%.

Have a great weekend!

FASB

Hedge Accounting

This week the FASB issued a Discussion Paper to solicit input on how to improve, simplify, and converge the financial reporting requirements for hedging activities.  As you may recall, back in December we issued a comment letter to the FASB on their proposed hedge accounting requirements.   We are in the process of issuing a comment letter to the IASB on their proposed hedge requirements.  That comment letter is due to the IASB by March 9^th.  The Discussion (more…)

AFP

Our organization has been very vocal in stating our views on the proposed lease accounting changes.  In December we issued a comment letter to the FASB/IASB citing our concerns.   Subsequently, I attended one of the leasing roundtables held at the FASB headquarters in Norwalk where the FASB and IASB members listened to constituents discuss the pros and cons to the proposed standards, and worked with the Boards on devising alternative views that might also be considered.  As a result of our efforts, we were quoted in the following news publication:  http://www.imakenews.com/epi_hfco/e_article001993007.cfm?x=bhRGDKk,b9WD2Q9r,w

On March 3^rd, AFP will host a webinar on  the US and International rules proposed for hedge accounting this is currently out for comment given my Sylvie Monett-Houle, a partner at KPMG.    This webinar will discuss the pros and cons of the proposed changes, and how such changes may affect a company’s ability to manage its  risk exposure.  It (more…)

Private Company Accounting Standards

 The Blue Ribbon Panel wrapped up its analysis of whether there should be concessions made to current Generally Accepted Accounting Principles (GAAP) for nonpublic companies.  The Panel recommended that the Financial Accounting Foundation (FAF) trustees, who also oversee the Financial Accounting Standards Board (FASB), to create a separate private company standard setting board that will be responsible for approving GAAP exceptions and modifications using the existing GAAP model. Private companies will still have the choice of following the current US (more…)

FASB

 On Tuesday, January 25, 2011, at 1:00 p.m. EST, the FASB will host a one-hour webcast, 2011 Chairman’s Outlook on the FASB, with FASB Chairman Leslie F. Seidman who will discuss the Board’s priorities for 2011, including updates on top projects and progress on its joint agenda with the International Accounting Standards Board.  The webcast is free of charge but you must preregister at FASB’s website at www.fasb.org. (more…)

FASB

The FASB and the IASB originally published separate proposals on credit impairment of financial assets. Although both boards proposed moving to a more forward-looking approach to accounting for impairment they proposed different models. (more…)

Public Company Accounting Oversight Board (PCAOB)

 This week I attended the PCAOB’s Standards Advisory Group (SAG) Meeting.  The topics discussed were (1) broker dealer audit considerations; (2) FASB/IASB projects and potential impact on auditors; (3) subsequent events; (4) auditors reporting framework; and (5) communications with audit committees.  (more…)

The Financial Accounting Standards Board (FASB) released on their website an Exposure Draft (ED) of a proposed Accounting Standards Update (ASU) intended to develop common requirements for measuring fair value and for disclosing information about fair value measurements in U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRSs). AFP will be reviewing this ED and making a decision on whether to issue a comment letter on behalf of our members in the upcoming weeks. Feel free to reach out to our staff should you have any issues with the propoasl.

The proposed ASU sets forth amendments that the Boards believe would improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments would apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in shareholders’ equity in the financial statements.

The IASB is publishing a measurement uncertainty analysis disclosure proposal, Measurement Uncertainty Analysis Disclosure for Fair Value Measurements, which is the same as a proposed disclosure requirement in the proposed Update

The comment period for the proposed ASU extends through September 7, 2010. The ED is available at www.fasb.org.