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The Week in Corporate Finance: A Worldwide Shift to Safety

  • By Brian Kalish
  • Published: 7/21/2014
This article was excerpted from AFP EconWatch. Read the full issue here.

The last few days have reminded us how precarious the world can be. A downed commercial airliner in the Ukraine and yet another flare up of violence in the Middle East has caused a worldwide flight to safety. Net-net, these events probably will not have much of a long-term effect on the strengthening U.S. economy. But as we have witnessed in recent years past, small, distant and seemingly unconnected events can have quite an unanticipated impact.

Over the past two weeks, we have seen a substantial amount of money move into U.S. Treasury securities. The two-year yield is down 3bps to 48bps (it was as high as 52bps recently, its highest level since September); the five-year note yield is down 7bps to 1.67 percent; the 10-year note yield is down 16bps to 2.48 percent (after being as low as 2.45 percent), and the 30-year bond yield is down 18bps to 3.29 percent (after being as low as 3.27 percent, its lowest level in 13 months).

The 30yr/5yr yield curve continues to flatten, falling to +163bps, its tightest level since February 2009. Over the past 12 months alone, the yield curve has flattened by 67bps, as the 30-year Treasury yield has dropped 35bps, while the five-year Treasury yield has increased 32bps. The w-year and especially the five-year points on the curve remain very vulnerable to potential changes in Fed policy. Treasury bills continue to trade at near-zero yields due to the belief that the likelihood of the Fed tightening before mid-year 2015 remains low.

Swap spreads widened this week due to geopolitical tensions in the world. The two-year swap spread touched 20.38bps, its widest level since August. This spread was as tight as 8.94bps back in April.

Even with all the turmoil in the world, the U.S. equity markets continue to charge ahead to new highs and near-highs. The Dow touched a new all-time high of 17,151.56 (up 9.82 percent over the past year); the S&P 500 continues to trade near its all-time high of 1,985.59 that it reached earlier this month (and is up 16.84 percent over the past 12 months); and the NASDAQ also continues to trade near its fourteen-year high of 4,485.93 (up 22.35 percent over the past year).

The employment news continues to improve, as this week we received two more positive updates. The BLS reported that for the first time since mid-2008, all 50 states plus the District of Columbia had unemployment rates of 7.9 percent or less and only nine states are at 7.0 percent or above. North Dakota continues to enjoy the lowest unemployment rate in the country at 2.7 percent, while Rhode Island and Mississippi continue to struggle with the highest rates in the country at 7.9 percent.

The other piece of positive news concerned weekly Initial Unemployment Claims, which saw a decrease to 302k from 305k. The four-week moving average dropped to 309k, which is its lowest level since June 2007, and is indicative of an economic expansion.

In corporate bond issuance-land, Bed, Bath & Beyond was in the market with a $1.5 billion, three-tranche offering. It was comprised of $300 million of a 10-year note, $300 million of a 20-year note and $900 million of a 30-year bond.

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