Something strange is afoot in the markets. The Morningstar Corporate Bond Index tightened 15 basis points through last Thursday night, adding more fuel to the record pace of new issuance seen in July.
Notably, McDonald's (Morningstar credit rating: AA-) issued $750 million of notes at spreads tighter than our AA- rating would suggest, and well inside spreads implied by the major agencies' ratings. The fast food chain tapped the market in two tranches: a $350 million 10-year at 55 basis points over, yielding a coupon of 3.5%, and a $300 million 30-year at 85 basis points over, yielding a coupon of 4.875%. Our AA- 10-year average spread is about 90 basis points. Also of note, AT&T (Morningstar credit rating: A-) pulled in $2.25 billion from a five-year note offering priced at about 80 basis points over, with a 2.5% coupon.
Friday was an entirely different story. A slightly weaker-than-expected second-quarter GDP growth figure from the US government and downward revisions to previous estimates sparked a sharp drop in US Treasury rates, with the 10-year falling 9 basis points to 2.9%. Corporate spreads widened across the board.
Also on the negative side, European short-term funding markets have barely moved after a full week of digesting the results of bank stress tests. Three-month euro LIBOR remains elevated, inching up 1 basis point on the week to 0.89%. Perhaps a harbinger of what we will see in Portugal, Italy, Ireland, Greece, and Spain, BBVA, the second-largest bank in Spain, reported earnings. We find it curious that while the company stated that loan losses were declining, it increased its loan-loss provisions to EUR 1.3 billion.
Though the fixed-income markets have been turbulent, equities essentially yawned during the week. The S&P 500 entered Friday flat and proceeded to quickly rebound from a drop following the GDP number to trade more or less even for the rest of the day. The index ended July nearly 7% higher than the month began, while London's FTSE 100 rallied 7% over the month and other European markets such as Paris' CAC 40 achieved gains in excess of 5%.
The fixed income and equities markets enter the traditionally slow period at the tail end of summer seemingly pointing in opposite directions, struggling to interpret the bevy of recently released economic data. Each piece of news seems to foster multiple interpretations. For example, the US GDP figure, while weak overall, included strong nonresidential investment (up 17% year over year), a sign of optimism regarding the future. And in US housing data for the week, new home sales were up sharply sequentially in June, showing signs that the market is bouncing back from depressed levels following the tax credit expiration. But activity was still down big year over year. Fed chairman Ben Bernanke's "unusually uncertain" comment from a week ago remains apropos.
