Weekly Market Update - July 26, 2010

Interest Rate Data Points

Bond Market Commentary

• Bernanke’s Semiannual Report to Congress
Federal Reserve Chairman Ben Bernanke gave the Federal Reserve’s semiannual Monetary Policy Report to the Senate Banking Committee on Wednesday. He stated the Fed’s forecast for a reduction in unemployment is now expected to be “somewhat slower than previously expected.” The Chairman said most members of the Fed are concerned that financial conditions “have become less supportive of economic growth in recent months” due to the European banking crisis. He highlighted the Federal Reserve’s plans for reducing its balance sheet while reiterating that policymakers are prepared “to take further policy actions as needed” to avoid another recession.
• Build America Bonds
  Currently large, high quality (AA1/AA+ or better rating) taxable municipal issuers command spreads similar to A-rated industrials like CISCO and AT&T (+50 to +125 basis points), whereas lesser-known issuers with a low AA-rating trade in line with A-rated banks and brokers (+150 to +225 basis points). State of California, Illinois, and New York General Obligations combine to make up a large portion of the bonds outstanding and trade at wider levels than similarly rated sovereign and corporate debt. Citigroup recently finished a road show pitching Build America Bonds to large global investors in an effort to expand the investor base to soak up the supply; substantial new issue supply is expected to continue into 2011. According to Citigroup, the response was very positive with investors eyeing the relatively wide spreads. Whether global involvement in the BABs market tightens spreads in the face of rising domestic skepticism about municipal balance sheets has yet to be seen.
• European Stress Tests
  91 banks in Europe were subjected to stress tests, assessing their ability to withstand a recession and/or sovereign-debt crisis. After the tests, only seven banks failed to meet the 6% Tier 1 capital ratio required to pass. The total capital these seven institutions need to raise is 3.5 billion Euros, which is far lower than many investors were anticipating and has sparked some concerns that the tests were too lenient. However, the stress test was meant to evaluate potential losses on government bonds banks trade as opposed to those expected to be held to maturity. Over the last 15-18 months, European banks have raised 220 billion Euros combined, which is considerably more than U.S. banks raised prior to their stress tests last year. While speculation on the accuracy of the tests and an in-depth review of the results is likely to take place over the next few days, stocks of large banks such as France’s BNP Paribas and the U.K.’s Barclays Plc rose 2% and 2.3% respectively. Thus far, activity in the credit markets has been positive but relatively quiet.