AFP Blogs

While Washington, D.C., and most of the northeastern United States tries to get back on its feet after suffering through what has been the snowiest winter since William McKinley was president, the rest of the world was focused on events in Europe (specifically Greece), and China.

Signs that the European Union (EU) will provide some sort of support and aid to Greece was enough to create a bit of a floor for the troubled sovereign credit and the Euro itself. After the freefall of credit spreads, CDS, equities, commodities and currencies over the past couple of weeks, this week actually seems calm.

We will have to take a wait-and-see approach to developments in Europe. How the EU would response to a further deterioration of the situation is foremost on people’s minds.

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To paraphrase Frankie Valli and the Four Seasons, the word of the week is “Greece”. Concerns about the financial stability of the Greek economy were the focus of the global capital markets. Because Greece is a member of the European Community (EC), questions have been raised about the value of the currency, the riskiness of credit in Europe and the impact on the potential growth of the European economy.

Unlike 2009, when the general feeling was that all the economies were slowing down as a result of the financial crisis, 2010 is already shaping up as a year where individual countries’ economies will not be moving in such lockstep.

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Overhauling the financial markets could keep cash yields low for the foreseeable future, according to one observer. “This is already evident in the expected changes in 2a-7 money market regulations suggested by the Investment Company Institute, the President’s Working Group on Financial Markets, and the SEC that would have an impact on the Weighted Average Maturity, liquidity, and credit quality of money market funds,” says Adrian Schultes, CFA, vice president of PIMCO. “The exact role of money market funds and their intermediating role in the daily liquidity of the marketplace are still critical questions that will have to be addressed in the coming months.”

Three PIMCO financial experts will discuss how treasury can invest their corporate cash in a one-hour Webinar on Jan. 14 at 3:30 pm. “Investing your Corporate Cash: Opportunities in the Cash and Short Duration Markets in the New Normal” will feature advice from Paul McCulley, PIMCO’s Managing Director, Generalist Portfolio Manager, as well as EVP Jerome Schneider and SVP Paul Reisz.

The Webinar will focus on:
• the state of the economy and its impact on the cash markets
• the outlook for the markets
• a framework to assess liquidity needs and asset allocation.

This Webinar has been approved for CPE credits. For more information on obtaining CE credits by participating in AFP webinars, please view the re-certification requirements.

Global Capital Markets

Abu Dhabi provided $10 billion to help Dubai World, the state-owned holding company, avoid defaulting on a $4.1 billion bond payment that roiled global financial markets during the past month.

Companies with credit ratings below investment grade have sold a record $150.6 billion of U.S. corporate bonds this year as borrowers take advantage of surging demand for debt securities after last year’s credit freeze. Sales of high-yield, high-risk junk bonds compare with $149.1 billion in all of 2006, the previous high.

Corporate bond sales in Europe are exceeding the amount raised through bank loans for the first time, with issuance by non-financial companies doubling to a record 337 billion euros this year. Syndicated loans, or debt underwritten by a group of banks which they then sell to investors, fell 46 percent to 279 billion euros

Westpac Banking Corp. raised A$2 billion ($1.8 billion) from bonds backed by home loans in the first such sale by one of Australia’s top four lenders since the financial crisis began in 2007.

Brazil sold $500 million of 10-year bonds in the country’s fifth international dollar bond offering this year.

Denmark’s record $115 billion mortgage-bond auction drew yields at the lowest level since adjustable interest-rate loans were started 13 years ago

Panama scrapped a plan to sell $760 million of bonds through a state development fund after the offer sparked a rout in the country’s debt.

Leveraged-loan returns surpassed 50 percent this week as new bank debt, sold by companies seeking to pay for buyouts, issue dividends or refinance borrowings, rose in the secondary market.

U.S. Treasuries

Treasuries headed for a weekly gain, trimming this year’s loss, as stocks fell around the world on concern the global economic recovery will slow. (more…)

Global Capital Markets

BlackRock Inc., and Time Warner Cable Inc. led a 75 percent surge in U.S. corporate bond offerings this week as issuers took advantage of the cheapest relative borrowing costs in almost two years to refinance debt. Sales of $22 billion compare with $12.6 billion last week. New York-based BlackRock issued $2.5 billion of debentures to repay commercial paper in its first bond sale in two years. Time Warner Cable, also located in New York, sold $2 billion of notes as the second-biggest U.S. cable television-operator raised cash to reduce bank debt and commercial paper.

Mexico is issuing its first yen-denominated bonds, placing 150 billion yen ($1.7 billion) in Japanese markets. The Treasury Department says the so-called Samurai Bonds are 10-year instruments maturing in 2019, with a 2.22 percent interest rate

Kia Motor’s Corp.’s U.S. unit plans to raise $300 million from the first kimchi bond sale in more than two years as it seeks working capital for a new factory.

Wind Acquisition Holdings Finance SA is raising 500 million euros ($740 million) by issuing Europe’s first payment-in-kind notes since the credit crisis started in 2007.

U.S. Treasuries

Treasuries declined, with the yield gap between Treasury 2-year notes and 30-year bonds reaching the widest since at least 1980 amid lower-than-forecast demand for the $74 billion in notes and bonds auctioned in the week. Treasury 10-year notes fell for a second consecutive week as reports showed consumer confidence and retail sales rose more than forecast. (more…)

Global Capital Markets

Bank of America raised $19.3 billion selling securities at $15 apiece in the biggest sale of stock or preferred shares by a U.S. public company since at least 2000.

Nomura Holdings Inc. sold 1 billion euros ($1.5 billion) of bonds in what Japan’s biggest brokerage described as its debut international benchmark offering that pays a fixed rate, as it seeks to diversify its funding.

U.S. Treasuries

Treasury two-year notes fell the most since August as the U.S. economy lost the fewest jobs last month since the recession began and a Federal Reserve report said economic conditions had improved “modestly.” (more…)

OTC derivatives reform was the topic of a Senate Agriculture Committee hearing Wednesday. Treasury Secretary Timothy Geithner was among the witnesses to testify. Also on the list: Jiro Okochi, CEO of Reval, a derivative risk management and hedge accounting provider. Okochi told the full Ag Committee how the proposed legislation would impact derivatives end users.

“That was my first time testifying before Congress and it was quite an honor and privilege,” he said. “The consensus I sensed from the Senators’ questions to me and Geithner’s responses to their questions was they understand there needs to be special considerations for end users. The senators clearly recognize that end users weren’t to blame so hopefully the bill will have fairly broad exemptions.”

Okochi proposed adding a risk management policy stipulation to the legislation to avoid Congress creating carveouts — or, worse, leaving carveouts up to regulators. He also suggested exempting derivatives younger than 12 months, including FX forwards and swaps, single-currency interest rate swaps and commodity swaps that don’t physically settle. “These one-year swaps generally don’t pose much systemic risk,” said Okochi, who also reminded the committee that not exempting swaps sold for margining and capital will lead to the margining being passed on to the corporates, “which defeats the purpose,” he said.

Global Capital Markets

Cisco Systems and U.S. wireless carrier Clearwire led $96.9 billion of bond sales this month, the busiest November since 2006, as companies took advantage of near-zero interest rates.

U.S. corporate bond sales reached an annual record of $1.171 trillion as borrowers took advantage of low interest rates and surging demand for debt securities following last year’s credit freeze. Sales of investment-grade and high-yield, high risk debt compare with the more than $1.167 trillion that companies sold in all of 2007, the previous record. Last year, the total was $874 billion.

Companies sold a record $385.9 billion in the first quarter of this year as borrowers accessed the thawing credit markets. Corporate issuance was $331.9 billion in the second quarter and $268.4 billion in the third quarter.

Volkswagen and Vivendi led a more than three-fold increase in non-financial bond sales this week as companies rushed to take advantage of the lowest yields in four years.

China’s finance ministry completed its first sale of 50-year debt at a lower-than-expected yield as brokerages said life insurers purchased the securities.

U.S. Treasuries

Treasuries advanced the most this month after a proposal from Dubai to delay debt payments set off a slide in stocks and higher-yielding assets worldwide.

The Treasury sold $44 billion of two-year notes at a yield of 0.802 percent, the lowest on record, as demand for the safety of U.S. government securities surges going into year-end.

Swaps

Interest-rate swap spreads widened after Dubai’s attempt to reschedule its debt payments rattled investors and reduced demand for higher-yielding assets.

The difference between the rate to exchange floating- for fixed-interest payments and U.S. Treasury yields for two years, known as the two-year swap spread, widened 3.94 basis points to 33.19 basis points. Swap spreads are based in part on expectations for the London interbank offered rate, or Libor, and are used as a gauge of investor perceptions of credit risk.

Commercial Paper Update

The U.S. CP market contracted in the latest week, Federal Reserve data showed on Friday. It was the third weekly contraction in four weeks. For the week ended Wednesday Nov. 25, the size of the U.S. CP market fell by $10.7 billion to $1.257 trillion outstanding.

LIBOR

The cost of borrowing between banks fell. The British Bankers’ Association said the rate on three-month loans in dollars, the London Interbank Offered Rate, or Libor, fell to 0.2556 percent from 0.2606 percent

Money Market Funds

A group of investors including Ameriprise Financial Inc. won a victory when a federal judge ordered the Reserve Primary Fund to distribute its assets equally among all shareholders. 

Central Banks

Russia’s central bank cut its key interest rates to a record low in the ninth reduction since April.

Hungary’s central bank cut its benchmark interest rate to the lowest in more than three years today to speed the country’s recovery from its worst recession in 18 years, which helped slow inflation.

Vietnam raised the benchmark interest rate to 8 percent, the first increase since January, and narrowed the dong’s trading band to 3 percent from 5 percent.

Banking

U.S. “problem” lenders climbed to the most in 16 years and the Federal Deposit Insurance Corp.’s fund protecting customers against bank failures slipped into a deficit in the third quarter, the agency said.

Credit Ratings

Mexico’s investment-grade credit rating was lowered by Fitch. Fitch cut Mexico’s foreign debt rating one level to BBB, the second-lowest investment grade and in line with countries including Russia and Thailand, and changed the outlook to stable from negative. The downgrade was the first by Fitch since it gave Mexico an initial rating of BB in 1995 and the first by any ratings company since S&P cut it in the wake of the 1994 peso devaluation.

Los Angeles, the largest city in California by population, had its credit rating lowered on $2.94 billion of debt by Fitch, which said the city’s deficit next year will exceed 9 percent of revenue. Fitch said in a statement it lowered ratings to AA- from AA on $1.5 billon of general obligation bonds and to A+ from AA- on $1 billon of the city’s certificates of participation, or municipal bonds backed by the general fund, $25 million of judgment obligation bonds and $419.7 million of debt sold for the Los Angeles Convention and Exhibition Center Authority.

Rating Agencies

Connecticut plans to join Ohio in suing credit-rating companies for “negligent, reckless and incompetent work” in grading debt purchased by state pension funds.

M&A

Reliance Industries made a cash offer to buy a controlling stake in closely held LyondellBasell Industries AF, the bankrupt chemicals and fuels maker.

Windstream Corp., the rural U.S. home-phone carrier, agreed to buy Iowa Telecommunications Services Inc. for about $530 million in cash and stock to expand into Iowa and Minnesota.

CDS

Dubai’s attempts to delay debt repayments spurred an increase in the cost of insuring government and company bonds from default around the world and may curb lending throughout the Persian Gulf. The cost to protect U.S. corporate bonds from default rose to the highest in almost a month.

Currencies

The dollar dropped to a 14-year low against the yen.

Commodities

Gold climbed to the highest price ever, capping the longest rally in 27 years, as the dollar’s slump deepened and on a report that India’s central bank may add to last month’s 200 metric-ton purchase. Gold reached a record $1,189 an ounce and has rallied 13 percent since Nov. 2, after India said it bought bullion from the International Monetary Fund.

When it comes to hedging, don’t make assumptions about what you think senior management wants, or about what the financial markets will do. That’s the advice from Lilly Palmieri, an institutional investment consultant with Rogerscasey. Palmieri will lead AFP’s Financial Risk Management Seminar, December 2-3, in New York City.

“I have seen examples of treasury personnel executing hedging strategies that they believe are conservative and in line with overall management policy, but without knowing what management was measuring them against,” she says. “If there are various alternatives, communicating the decision-making process in advance gets buy-in.”

What attendees will get from the financial risk management seminar:
• A process to consider as they look at treasury operations
• Tools to identify and manage treasury risk issues
• Resources to continue developing their quantitative and qualitative skills
• Case studies with answer sheets and highlighted concepts and computations
• Application-focused checklists
• AFP’s Risk Management: A Risk Mapping Guide.

Register for the seminar here.

This seminar is approved for up to 11 CTP/CCM and CPE credits.

Global Capital Markets

Borrowers sold $6.3 billion of U.S. corporate bonds that mature in 30 years or more, the biggest weekly total since January.

Banks are carrying more short-term debt on their balance sheets than at any time in at least 30 years. About $10 trillion of bank debt will come due between now and 2015, with $7 trillion maturing by 2012.

U.S. Treasuries

Treasuries headed for a weekly gain after the U.S. completed the sale of $81 billion of notes and bonds amid speculation the Federal Reserve will keep interest rates near record lows for the foreseeable future.

Commercial Paper Update

The U.S. CP market shrank for a second straight week, stalling a three-month expansion. For the week ending Nov. 11, the CP market fell $76.6 billion to $1.239 trillion outstanding from $1.315 trillion the previous week, Federal Reserve data showed.

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