Last week we saw a relatively large range in yields on the 10 year treasury as European financial issues came front and center after lying in the weeds for the last 1-2 years. Recall that 5 years ago European countries were the topic of almost daily concern in the U.S. This time it was Italy that with debt concerns which caused a huge spike in their interest rates while the ‘flight to safety’ caused the U.S. rates to tumble. The 10 year treasury closed on Tuesday (after a holiday Monday) at 2.77%. By Wednesday Italy was in the rear view mirror and U.S. rates started moving higher closing the week at around 2.89%.
For this week we don’t have a single Fed President scheduled to give a speech–yea to that–we don’t need more information that simply muddies the waters. Few economic reports due this week are likely to move the markets. On Monday we have Factory Orders being announced and while an important report as part of the larger puzzle, it is unlikely to move markets. Tuesday we have the JOLTS (Job Opening and Labor Turnover) report and this important as it shows how many jobs are available and it has been standing high around 6.5 million. This may convey in a minor way the amount of pressure which will continue on wages, which is a key inflation indicator. We also have the Purchasing Manager Index (PMI) and the Institute of Supply Management (ISM) reports on Tuesday and neither will move the markets. On Wednesday we have the Mortgage Banker Association release of applications for new mortgages. On Thursday and Friday we have a few minor reports, but nothing of significance.
We have announcements on Thursday of the amount of bills and bonds that the treasury will sell next week. This is important only in that it gives us an indication of what the market will have to absorb as the country has a huge projected deficit that has to be financed.
The Fed Balance sheet contracted by $10 billion last week as they let the ‘run-off’ occur. With demand strong (and interest rates falling) last week for bills and bonds it was a good week to let billions run off the balance sheet.
Last week we had MetLife (NYSE:MET) priced a new issue of non cumulative, fixed rate preferreds at 5.625%. The issue is investment grade and is trading on the OTC Grey market under ticker MTLLP and is pricing right around $25.00.
Additionally BDC Prospect Capital (NYSE:PSEC) sold a new issue of baby bonds which priced right at 6.25%. The company already has an issue of baby bonds outstanding with a coupon of 6.25%. The new issue which will trade under the ticker PBY is not yet trading.
Last week the trust preferred shares of Glacier Water Services (acquired by Primo Water) with a coupon of 9 1/16% were finally called for redemption at the end of June. Shares had been trading at $26.70 the day before the call and promptly fell to trade around $25.14 on Friday. We estimate the value of these shares to be $25.27 which is $25 plus 1.5 dividends (they pay monthly).
The week ahead has the potential to be a relatively quiet week with the biggest potential issue being the North Korean summit being cancelled again which could cause a rush into bonds. The summit is scheduled to happen a week from tomorrow in Singapore and hopefully the parties can be civil to each other and not cause further consternation.