A Eurozone Remedy
By Benjamin Streed
March 05, 2012
Corporate bond issuance continues to show strength despite lingering concerns out of the European Union’s ability to resolve the Greek debt crisis and mixed economic news out of much of the developed world. Jobless claims continue to show some continued signs of strength despite homebuilding, industrial production and retail sales continued struggles. The Eurozone appears to have resolved the Greek debt crisis for the time being, but it may run into difficulty with private creditors who must decide this week whether or not to sign-off on the country’s proposed debt restructuring deal penned last month. The success, or failure, of the country’s €106 billion ($140 billion) debt swap deal hinges on how many private creditors agree to a writedown by the March 8th deadline. Many market participants believe that they will agree to the proposed writedowns to avoid triggering what are being labeled “collective action clauses” that could be used by Greece to force investors to meet the proposal and could potentially trigger credit-default swap contracts on the country’s debt. The writedowns are intended to reduce Greece’s debt-to-GDP ratio from a current level of 165% to a more stable 120.5% by 2020. Euro-area finance ministers will hold a teleconference on Friday to reveal the outcome of the deal. Should the deal be completed as anticipated, leaders of the European Union have indicated that they will shift their policy focus away from cost-cutting and austerity measures to instead focus on growth measures that could help stimulate the entire region. Notably, last week the European Central Bank completed a 3-year Long Term Refinancing Operation (LTRO) in which it loaned nearly €530 billion to banks in hopes of further insulating potentially troubled subsidiaries. The LTRO participation helped the market anticipate a positive resolution to the Greek mess as Italian and Spanish debt, which are often used as gauges for non-Greek European peripheral risk, rallied last week to levels not seen since last June. Italy’s 10-yr yield touched 490bp on Friday, while the Spanish 10-year note touched 492bp marking its lowest level since December 2010. EU president Herman Van Rompuy summed up the region’s situation nicely when he stated that, “We’re in calmer waters”, while also indicating that they’re not quite out of the woods yet. Humorously, Austrian Finance Minister Maria Fekter remarked that, “If you have a sick child in the family, you don’t abandon it, but work on a remedy. That’s what we’re currently trying to do with Greece.”
According to Bloomberg data, U.S. investment-grade corporate bond sales totaled $147 billion last month as issuers looked to take advantage of record low borrowing rates for investment-grade debt. According to the Citigroup IG Corporate Index, yields for investment-grade corporate debt began the year at 368bp, which was slightly higher than 2011’s low of 336bp set back in August. The current yield on the index sits at only 319bp, marking the lowest level on record, and perhaps even more compelling is that the total market value of all included issues has risen to a staggering $3.34 trillion from only $1.9 trillion just three years ago. Meanwhile, returns for the broad investment grade index reached 0.93% for the month of February, marking the best February for corporate bond returns since 2007.
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