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Tag >> bonds
Say this for Goldman Sachs. It is hard to go wrong following the investment bank's lead.
Okay, so maybe they bet against their customers, as we learned from the credit default swaps case brought against the firm by the SEC earlier this year.
The recently enacted financial reform bill addresses most aspects of the financial services industry. But there are still two major areas which still need the attention of lawmakers--government-sponsored enterprises (GSEs) and covered bonds.
Of the two, the most needed reform is that of GSEs, as Hank Paulson brought up in an op-ed to the Washington Post last week.
After fits and starts since the European sovereign debt began in April, the primary bond market finally reopened this week, and companies are taking full advantage of it.
Driven by better-than-expected earnings, a speculative-grade default rate that continues to fall and results of European banks stress tests that seem to have contented many investors, companies - both investment grade and high yield -- are jumping at the opportunity to raise fresh debt before the usual late-summer lull in investor interest sets in.
For the past year, it has become fashionable for pundits and so-called political experts to predict the inevitable demise of the US and the end of the dollar as a reserve currency.
They assert the leaders of the global economy will shift to China and some of the other emerging markets.
In addition to unrated bonds, another financing option that’s of increasing interest to global corporations is the Shari’ah-compliant bond market. Coming out of the crisis in a much healthier state than most other products and markets, Islamic finance has become a $1 trillion industry worldwide.
Not only did emerging market bonds show stronger fundamentals throughout the crisis, but the home countries of many big Islamic institutions are also oil-exporting countries that continue to boast fiscal surpluses and large current accounts.
Thanks to strong balance sheets and high cash reserves, demand is clearly outstripping supply in the US investment grade markets. Creditworthy corporates are taking advantage of stellar conditions in the bond markets to issue debt at prices not seen since the 1990s – yields are hovering just above 4 percent.
The companies are using the proceeds either to refinance existing debt at lower rates or simply to strike while the iron is hot and build their liquidity cushion. Companies are also pushing out maturities for the first time since the crisis began, with a number of 10-year issues and even a few 30-year tranches being launched. Much the same can’t be said for the overall corporate bond market, at least this week.
It has been almost seven weeks since any European bank issued senior unsecured bonds in the market. Partly to blame is the rapid rise in spread levels, which over that time have increased by 50 bps to 100 bps for double AA-rated banks in Northern Europe and by much more for their cousins from Southern Europe.
But an equal cause of the drought has been the EU-wide guarantee schemes that individual countries set up from October 2008 in the wake of Lehman Brother's collapse. Many of these schemes were due to end last year but they have been extended. Reports suggest that Germany, the Netherlands, Sweden and Hungary are likely to extend their guarantee schemes beyond June 30th. France Italy and the UK are likely to let their schemes lapse (although the UK allows the government guaranteed bonds issued by banks to be refinanced until 2014).
Issuance of investment-grade corporate bonds continue to be on hold despite the European Union having agreed to a rescue package for Greece in the hope to contain contagion of its fiscal problems to other countries.
The three-month London interbank offered rate is also at its highest level since August as my colleague Denise noted in a post earlier this week. Spreads of corporate bonds, especially those of financial services companies's bonds, have also widened since the crisis in Greece started.
Although dollar Libor rates have not hit the peak seen during the crisis in 2008, the three-month rate is now at the highest level since last August – at 0.421 percent on Monday - and the Libor Overnight Indexed Swap (OIS) spread, which gauges banks’ willingness to lend to other banks, is also at its widest since last August – at 19.2 basis points on Monday.
The rise shows that banks and institutional investors are becoming more risk-averse as fears rise over growing European deficits. Investors are wary of buying banks’ commercial paper, and both banks and institutional investors are looking for safe haven longer-term investments to wait on the outcome of ECB and EU stabilization measures.
Posted by Ron F in Timothy Geithner, Geithner, financial crisis, European Union, europe, Euro area, economy, demand, default, career/management, bonds, Banks, banking reform, bailouts
The violent backlash against the rescue plan that Europe has come up with for Greece should be a warning sign for those who think the bond market should rule public policy.
Yes, Greece must get its act together in terms of the black market and corruption, and tighten its belt on public finances. It simply has no other choice. But austerity isn't going to help the country repay its debt, not when the global economy continues to suffer from weak demand.
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