April 6 (Bloomberg) -- U.S. stocks rose for a third day as the Federal Reserve suggested it plans to leave its benchmark interest rate at a record low to safeguard the economic recovery and banks rallied on analyst upgrades.
SunTrust Banks Inc. rose 3.6 percent as Credit Suisse Group AG said the lender may be a takeover target, while Regions Financial Corp. jumped 6.1 percent as its share-price estimate was lifted. Massey Energy Co. fell 11 percent after an explosion at a coal mine in West Virginia killed 25 workers and left four missing. Benchmark indexes climbed to their highs of the day after minutes from the last Fed policy meeting showed some policy makers warned of raising rates too soon.
“Overall, the momentum remains positive,” said Alan Gayle, a money manager at RidgeWorth Investments in Richmond, Virginia, which oversees $63 billion. “The economic data of late is surprising to the upside and April tends to be a fairly good month from a seasonal perspective.”
The Standard & Poor’s 500 Index increased 0.3 percent to 1,191.43 at 2:45 p.m. in New York after erasing a 0.4 percent slide. The Dow Jones Industrial Average rose 10.27 points, or 0.1 percent, to 10,983.82 after falling as much as 46 points earlier.
U.S. equities opened lower on concern a yearlong rally left the S&P 500 too expensive after the benchmark gauge closed at an 18-month high yesterday. The index is trading at 19 times the reported operating profits of its companies, the highest price- earnings ratio this year, according to Bloomberg data.
Stocks turned higher as the minutes from the Fed’s March meeting showed officials saw signs of a strengthening recovery while warning it could be hobbled by high unemployment and tight credit.
“While recent data pointed to a noticeable pickup in the pace of consumer spending during the first quarter, participants agreed that household spending going forward was likely to remain constrained by weak labor market conditions, lower housing wealth, tight credit, and modest income growth,” minutes of the March 16 Federal Open Market Committee released today in Washington showed.
Stocks rose yesterday after a report April 2 showed the biggest increase in jobs in three years. Releases on April 5 showing growth in service industries and home sales boosted optimism an economic recovery may be gathering steam.
Regional banks climbed after Credit Suisse said SunTrust may be a target for overseas financial companies. The firm also increased its price estimate for Regions Financial Corp. to $8 from $7. SunTrust climbed 3.6 percent. Regions rallied the most in the S&P 500, adding 6.1 percent to $8.69.
Financial companies gained the most in the S&P 500 among 10 groups, led by bank stocks. Eight industry groups in the benchmark index declined, while two advanced.
U.S. large-cap bank shares were raised to “market weight” from “underweight” at Wells Fargo & Co., which said “fundamentals and economy support a more positive outlook.”
El Paso Corp. rose after winning regulatory approval for its biggest expansion project, the $3 billion conduit that will carry gas from a trading hub in Opal, Wyoming, to interconnections near Malin, Oregon. Shares of the owner of the longest U.S. natural-gas pipeline network climbed as high as $11.85, the highest intraday price since October 2008.
Massey Explosion
Massey slumped 11 percent to $48.81, its biggest intraday decline since July, after the explosion.
CA Inc., the second-largest maker of software for mainframe computers, fell 1.8 percent to $23.43 after saying 2010 profit will be at the low end of its forecast range and it will cut about 1,000 jobs.
The S&P 500 has rallied 76 percent since March 2009 through yesterday as the Federal Reserve maintained record low interest rates and the economy began to recover from the worst recession since World War II. During the first quarter the gauge rallied 4.9 percent, the biggest advance to start a year since 1998.
Tuesday, April 6, 2010
U.S. Earned $10.5 Billion on TARP Investments, Analysis Show
April 6 (Bloomberg) -- The U.S. Treasury Department has made $10.5 billion, or an 8.5 percent return, on its bailout of financial firms, a private analysis shows.
The report, which tallies money the government earned on sales of preferred stock and warrants held under the Troubled Asset Relief Program, was issued this month by financial research firm SNL Financial of Charlottesville, Virginia.
The profit came from $118.3 billion in aid that has returned to Treasury from 49 firms that “fully exited” the government’s capital purchase program.
The Treasury said April 2 that its programs aimed at stabilizing the banking system “will earn a profit thanks to dividends, interest, early repayments and the sale of warrants.” Total investments of $245 billion last year, initially projected to cost $76 billion, are expected to be profitable, the department said a statement.
The SNL report said “proceeds from both TARP warrant repurchases and auctions have largely fueled the profitability of the programs. The redemptions of the preferred shares alone generally only provide the government a 5 percent return, which comes from the dividends.”
American Express Co. and Goldman Sachs Group Inc.’s warrant repurchases in July 2009 “helped create some of the largest annualized company returns at 23.3 percent and 20.0 percent,” according to the report’s authors, Andrew Schukman and Russ Yates.
The Treasury still expects to lose a total of $117 billion on TARP, which includes financing for the auto industry and American International Group Inc., according to the Financial Times.
Treasury spokeswoman Meg Reilly said “the outlook for the U.S. financial system has improved, taxpayers are being repaid, the expected cost of resolving the financial crisis has fallen dramatically, and Treasury is winding down many programs that were put in place to address the crisis.”
The report, which tallies money the government earned on sales of preferred stock and warrants held under the Troubled Asset Relief Program, was issued this month by financial research firm SNL Financial of Charlottesville, Virginia.
The profit came from $118.3 billion in aid that has returned to Treasury from 49 firms that “fully exited” the government’s capital purchase program.
The Treasury said April 2 that its programs aimed at stabilizing the banking system “will earn a profit thanks to dividends, interest, early repayments and the sale of warrants.” Total investments of $245 billion last year, initially projected to cost $76 billion, are expected to be profitable, the department said a statement.
The SNL report said “proceeds from both TARP warrant repurchases and auctions have largely fueled the profitability of the programs. The redemptions of the preferred shares alone generally only provide the government a 5 percent return, which comes from the dividends.”
American Express Co. and Goldman Sachs Group Inc.’s warrant repurchases in July 2009 “helped create some of the largest annualized company returns at 23.3 percent and 20.0 percent,” according to the report’s authors, Andrew Schukman and Russ Yates.
The Treasury still expects to lose a total of $117 billion on TARP, which includes financing for the auto industry and American International Group Inc., according to the Financial Times.
Treasury spokeswoman Meg Reilly said “the outlook for the U.S. financial system has improved, taxpayers are being repaid, the expected cost of resolving the financial crisis has fallen dramatically, and Treasury is winding down many programs that were put in place to address the crisis.”
Fed Officials Saw Recovery Curbed by Unemployment
April 6 (Bloomberg) -- Federal Reserve officials saw signs of a strengthening recovery that could be hobbled by high unemployment and tight credit, and some warned of raising rates too soon, according to minutes of their March meeting.
“While recent data pointed to a noticeable pickup in the pace of consumer spending during the first quarter, participants agreed that household spending going forward was likely to remain constrained by weak labor market conditions, lower housing wealth, tight credit, and modest income growth,” minutes of the March 16 Federal Open Market Committee released today in Washington showed.
Fed officials are looking for signs of self-sustaining growth before they begin their exit from the most aggressive monetary policy in history. Payrolls rose by 162,000 last month, the most in three years, and manufacturing grew at the fastest pace in more than five years. At the same time, sales of existing homes fell for a third month in February.
The FOMC said in its statement last month that the recovery “is likely to be moderate for a time.” Low rates of resource use and subdued inflation “are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” their statement said. Central bankers have used the “extended period” phrase in statements since March 2009.
Forward Guidance
The minutes showed policy makers discussed the statement language and said “such forward guidance would not limit the Committee’s ability to commence monetary policy tightening promptly if evidence suggested that economic activity was accelerating markedly or underlying inflation was rising notably.”
Stocks and Treasuries rose after the report. The Standard and Poor’s 500 index climbed 0.3 percent to 1,190.65 at 2:23 p.m. in New York. Yields on U.S. two-year notes fell two basis points to 1.14 percent. A basis point is 0.01 percentage point.
An extended period of low rates “might last for quite some time and could even increase if the economic outlook worsened appreciably or if trend inflation appeared to be declining further,” the minutes said. “A few members also noted that at the current juncture the risks of an early start to policy tightening exceeded those associated with a later start.”
The minutes also showed that policy makers were surprised by the rate at which inflation was decelerating.
A price gauge favored by Fed officials, the personal consumption expenditures price index, minus food and energy, rose 1.3 percent for the year ending February, slowing from a 1.5 percent rate in January.
Inflation Readings
“Participants saw recent inflation readings as suggesting a slightly greater deceleration in consumer prices than had been expected,” the minutes said. “A number of participants observed that the moderation in price changes was widespread across many categories of spending.”
Fed officials stated a longer-run goal of 1.7 percent to 2 percent for the full PCE price index in January. Central bankers last month left the benchmark interest rate in a range of zero to 0.25 percent, where it has been since December 2008.
Officials are considering a variety of tools to tighten policy, from raising the rate they pay on reserves banks keep at the Fed to selling assets. Officials discussed allowing maturing Treasury securities to roll off the balance sheet without reinvestment. Such redemptions would lower the interest rate sensitivity of the Fed’s portfolio over time, the minutes said, and limit the need to use other draining tools.
“Nevertheless, the initiation of a redemption strategy might generate upward pressure on market rates, especially if that measure led investors to move up their expected timing of policy firming,” the minutes said. “Participants agreed that the Committee would give further consideration to these matters” while the central bank continues its current practice of reinvesting all maturing Treasury securities.
Purchase Program
U.S. central bankers last month completed their program to purchase $1.25 trillion of mortgage-backed securities, expanding the Fed’s balance sheet to $2.31 trillion on March 31, near the record $2.32 trillion the previous week.
Chairman Ben S. Bernanke told the House Financial Services Committee March 25 that he anticipates “at some point we will in fact have a gradual sales process so that we can begin to move our balance sheet back to its pre-crisis condition” which he described as “under” $1 trillion.
Officials in January unanimously agreed that Fed assets and banks’ excess cash will need to shrink “substantially over time” and return the central bank’s holdings to just Treasuries.
Asset Bubbles
The minutes showed Fed officials are trying to identify potential asset-price bubbles and determine whether financial firms are using too much debt to boost returns.
“Members noted the importance of continued close monitoring of financial markets and institutions” in order to see “significant financial imbalances at an early stage,” the Fed said. “At the time of the meeting the information collected in this process, including that by supervisory staff, had not revealed emerging misalignments in financial markets or widespread instances of excessive risk-taking.”
“While recent data pointed to a noticeable pickup in the pace of consumer spending during the first quarter, participants agreed that household spending going forward was likely to remain constrained by weak labor market conditions, lower housing wealth, tight credit, and modest income growth,” minutes of the March 16 Federal Open Market Committee released today in Washington showed.
Fed officials are looking for signs of self-sustaining growth before they begin their exit from the most aggressive monetary policy in history. Payrolls rose by 162,000 last month, the most in three years, and manufacturing grew at the fastest pace in more than five years. At the same time, sales of existing homes fell for a third month in February.
The FOMC said in its statement last month that the recovery “is likely to be moderate for a time.” Low rates of resource use and subdued inflation “are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” their statement said. Central bankers have used the “extended period” phrase in statements since March 2009.
Forward Guidance
The minutes showed policy makers discussed the statement language and said “such forward guidance would not limit the Committee’s ability to commence monetary policy tightening promptly if evidence suggested that economic activity was accelerating markedly or underlying inflation was rising notably.”
Stocks and Treasuries rose after the report. The Standard and Poor’s 500 index climbed 0.3 percent to 1,190.65 at 2:23 p.m. in New York. Yields on U.S. two-year notes fell two basis points to 1.14 percent. A basis point is 0.01 percentage point.
An extended period of low rates “might last for quite some time and could even increase if the economic outlook worsened appreciably or if trend inflation appeared to be declining further,” the minutes said. “A few members also noted that at the current juncture the risks of an early start to policy tightening exceeded those associated with a later start.”
The minutes also showed that policy makers were surprised by the rate at which inflation was decelerating.
A price gauge favored by Fed officials, the personal consumption expenditures price index, minus food and energy, rose 1.3 percent for the year ending February, slowing from a 1.5 percent rate in January.
Inflation Readings
“Participants saw recent inflation readings as suggesting a slightly greater deceleration in consumer prices than had been expected,” the minutes said. “A number of participants observed that the moderation in price changes was widespread across many categories of spending.”
Fed officials stated a longer-run goal of 1.7 percent to 2 percent for the full PCE price index in January. Central bankers last month left the benchmark interest rate in a range of zero to 0.25 percent, where it has been since December 2008.
Officials are considering a variety of tools to tighten policy, from raising the rate they pay on reserves banks keep at the Fed to selling assets. Officials discussed allowing maturing Treasury securities to roll off the balance sheet without reinvestment. Such redemptions would lower the interest rate sensitivity of the Fed’s portfolio over time, the minutes said, and limit the need to use other draining tools.
“Nevertheless, the initiation of a redemption strategy might generate upward pressure on market rates, especially if that measure led investors to move up their expected timing of policy firming,” the minutes said. “Participants agreed that the Committee would give further consideration to these matters” while the central bank continues its current practice of reinvesting all maturing Treasury securities.
Purchase Program
U.S. central bankers last month completed their program to purchase $1.25 trillion of mortgage-backed securities, expanding the Fed’s balance sheet to $2.31 trillion on March 31, near the record $2.32 trillion the previous week.
Chairman Ben S. Bernanke told the House Financial Services Committee March 25 that he anticipates “at some point we will in fact have a gradual sales process so that we can begin to move our balance sheet back to its pre-crisis condition” which he described as “under” $1 trillion.
Officials in January unanimously agreed that Fed assets and banks’ excess cash will need to shrink “substantially over time” and return the central bank’s holdings to just Treasuries.
Asset Bubbles
The minutes showed Fed officials are trying to identify potential asset-price bubbles and determine whether financial firms are using too much debt to boost returns.
“Members noted the importance of continued close monitoring of financial markets and institutions” in order to see “significant financial imbalances at an early stage,” the Fed said. “At the time of the meeting the information collected in this process, including that by supervisory staff, had not revealed emerging misalignments in financial markets or widespread instances of excessive risk-taking.”
‘Unloved’ Junk Debt May Be Best Bond Investment: Credit Markets
April 6 (Bloomberg) -- Speculative-grade bonds with the highest rankings may offer the best returns after trailing the riskiest debt in a record credit-market rally.
Goldman Sachs Group Inc. is recommending high-yield, high- risk bonds with rankings in the BB tier, the first below investment grade on the Standard & Poor’s scale. Pioneer Investment Management Inc. favors BB and B bonds, the next lowest bracket, while saying the riskiest debt is overvalued. Debt ranked in the BB category gained 39.1 percent in the past 12 months, underperforming the CCC tier by 66 percentage points, according to Bank of America Merrill Lynch index data.
Junk bonds have rallied at an unprecedented pace since December 2008 after the market seizure that followed the failure of Lehman Brothers Holdings Inc. Companies are issuing record amounts of the debt as the economy improves, corporate default rates decline and the Federal Reserve holds interest rates at near zero, spurring investors to seek higher yields.
“BBs have been in an unloved space, too risky for investment-grade investors but not risky enough for high-yield investors,” said Alberto Gallo, a strategist at Goldman Sachs in New York. “That has preserved a lot of value.”
Investors seeking higher returns amid low rates will drive up prices on BB debt, which also offers some protection from defaults if the economic recovery flags, Gallo said.
Gains in speculative-grade debt are justified by lower default rates, said Andrew Feltus, a money manager who helps oversee $8 billion of high-yield debt at Pioneer in Boston. His $2.8 billion Pioneer High Yield Fund has returned 62 percent in the past year, in the top 5 percent of funds, according to data compiled by Bloomberg.
‘CCCs Look Rich’
“CCCs look rich to me,” Feltus said. “We’re not in love with leveraged buyouts, and the default rates will be higher for these securities.”
High-yield, high-risk, or junk, debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P.
Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government debt fell yesterday to 148 basis points, or 1.48 percentage point, the lowest since November 2007, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. The average yield rose to 4.075 percent, the highest since Feb. 24.
Leveraged Loans
Leveraged loan prices climbed 0.07 cent to 91.91 cents on the dollar, the highest since June 2008, according to the S&P/LSTA U.S. Leveraged Loan 100 index. Supervalu Inc., the second-largest U.S. grocery chain, extended the maturity of $2 billion of bank loans to 2015, according to a person familiar with the transaction. The Eden Prairie, Minnesota-based retailer also extended $500 million of its $1 billion term loan to October 2015 from June 2012, the person said.
Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds fell 0.02 percentage point to 4.65 percent, holding near the highest level since Aug. 10, Bloomberg data show. The Fed ended its unprecedented purchases of the debt last week.
An indicator of U.S. corporate credit risk rose from a more than two-week low today.
The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 1.2 basis point to a mid-price of 84.6 basis points as of 1 p.m. in New York, according to Markit Group Ltd. The index typically rises as investor confidence deteriorates and falls as it improves.
In London, the Markit iTraxx Europe Index on 125 investment-grade companies fell 0.69 basis point to 76.6 basis points, Markit prices show.
Junk Bond Offerings
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Nexstar Broadcasting Group Inc. of Irving, Texas, and Fort Myers, Florida-based Radiation Therapy Services Inc. led five companies that began marketing at least $1.34 billion of high- yield bonds yesterday.
Companies in the U.S. have issued $70.125 billion of junk bonds in 2010 as corporations with speculative-grade rankings sought to take advantage of the lowest borrowing costs since October 2007. That compares with $12.8 billion for the same period in 2009, Bloomberg data show.
The Bank of America Merrill Lynch U.S. High Yield Master II index gained 4.99 percent this year, following a 57.5 percent return in 2009. Debt graded in the CCC tier and below has more than doubled in the past year.
Tightening Spreads
Spreads on BB ranked debt have fallen 0.66 percentage point to 4.07 percentage points since the start of the year, the Bank of America Merrill Lynch index shows. That’s down from the record spread of 14.68 percentage points in December 2008 and above the long-term average of 3.84 percentage points.
For debt ranked CCC and lower, relative yields have declined 0.81 percentage point this year to 9.19 percentage points, index data show. That compares to the record 44.3 percent spread over benchmarks in December 2008 and is below the long-term average of 12.56 percentage points, index data show. BB rated bonds have returned 4.9 percent this year, while bonds rated B and CCC have returned 3.8 percent and 7.1 percent, respectively.
The bonds of companies with the highest junk ratings are poised to thrive in an economy that may slow as the Fed begins withdrawing a record $1 trillion in excess cash that propped up the banking system during the recession.
‘Sweet Spot’
“BBs in particular are the sweet spot for a slow recovery environment,” said Goldman Sachs strategist Gallo, who said investors in the bonds will benefit as the Fed keeps interest rates low to guard against another slump, while foreign investors seek higher yielding assets that offer a cushion against another slowdown.
Goldman Sachs, based in New York, estimates that the economy will grow at 2.6 percent in 2010, below the 3 percent median forecast, Bloomberg data show.
While Moody’s said the speculative-grade default rate will decline to 2.9 percent by the end of the year from a record 12.9 percent in November, companies with the lowest rankings will need a strong recovery to reduce debt and avoid default, Gallo said.
Fed officials said they planned to keep the main overnight interest rate near zero for an “extended period” after meeting on March 16.
Goldman Sachs Group Inc. is recommending high-yield, high- risk bonds with rankings in the BB tier, the first below investment grade on the Standard & Poor’s scale. Pioneer Investment Management Inc. favors BB and B bonds, the next lowest bracket, while saying the riskiest debt is overvalued. Debt ranked in the BB category gained 39.1 percent in the past 12 months, underperforming the CCC tier by 66 percentage points, according to Bank of America Merrill Lynch index data.
Junk bonds have rallied at an unprecedented pace since December 2008 after the market seizure that followed the failure of Lehman Brothers Holdings Inc. Companies are issuing record amounts of the debt as the economy improves, corporate default rates decline and the Federal Reserve holds interest rates at near zero, spurring investors to seek higher yields.
“BBs have been in an unloved space, too risky for investment-grade investors but not risky enough for high-yield investors,” said Alberto Gallo, a strategist at Goldman Sachs in New York. “That has preserved a lot of value.”
Investors seeking higher returns amid low rates will drive up prices on BB debt, which also offers some protection from defaults if the economic recovery flags, Gallo said.
Gains in speculative-grade debt are justified by lower default rates, said Andrew Feltus, a money manager who helps oversee $8 billion of high-yield debt at Pioneer in Boston. His $2.8 billion Pioneer High Yield Fund has returned 62 percent in the past year, in the top 5 percent of funds, according to data compiled by Bloomberg.
‘CCCs Look Rich’
“CCCs look rich to me,” Feltus said. “We’re not in love with leveraged buyouts, and the default rates will be higher for these securities.”
High-yield, high-risk, or junk, debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P.
Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government debt fell yesterday to 148 basis points, or 1.48 percentage point, the lowest since November 2007, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. The average yield rose to 4.075 percent, the highest since Feb. 24.
Leveraged Loans
Leveraged loan prices climbed 0.07 cent to 91.91 cents on the dollar, the highest since June 2008, according to the S&P/LSTA U.S. Leveraged Loan 100 index. Supervalu Inc., the second-largest U.S. grocery chain, extended the maturity of $2 billion of bank loans to 2015, according to a person familiar with the transaction. The Eden Prairie, Minnesota-based retailer also extended $500 million of its $1 billion term loan to October 2015 from June 2012, the person said.
Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds fell 0.02 percentage point to 4.65 percent, holding near the highest level since Aug. 10, Bloomberg data show. The Fed ended its unprecedented purchases of the debt last week.
An indicator of U.S. corporate credit risk rose from a more than two-week low today.
The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 1.2 basis point to a mid-price of 84.6 basis points as of 1 p.m. in New York, according to Markit Group Ltd. The index typically rises as investor confidence deteriorates and falls as it improves.
In London, the Markit iTraxx Europe Index on 125 investment-grade companies fell 0.69 basis point to 76.6 basis points, Markit prices show.
Junk Bond Offerings
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Nexstar Broadcasting Group Inc. of Irving, Texas, and Fort Myers, Florida-based Radiation Therapy Services Inc. led five companies that began marketing at least $1.34 billion of high- yield bonds yesterday.
Companies in the U.S. have issued $70.125 billion of junk bonds in 2010 as corporations with speculative-grade rankings sought to take advantage of the lowest borrowing costs since October 2007. That compares with $12.8 billion for the same period in 2009, Bloomberg data show.
The Bank of America Merrill Lynch U.S. High Yield Master II index gained 4.99 percent this year, following a 57.5 percent return in 2009. Debt graded in the CCC tier and below has more than doubled in the past year.
Tightening Spreads
Spreads on BB ranked debt have fallen 0.66 percentage point to 4.07 percentage points since the start of the year, the Bank of America Merrill Lynch index shows. That’s down from the record spread of 14.68 percentage points in December 2008 and above the long-term average of 3.84 percentage points.
For debt ranked CCC and lower, relative yields have declined 0.81 percentage point this year to 9.19 percentage points, index data show. That compares to the record 44.3 percent spread over benchmarks in December 2008 and is below the long-term average of 12.56 percentage points, index data show. BB rated bonds have returned 4.9 percent this year, while bonds rated B and CCC have returned 3.8 percent and 7.1 percent, respectively.
The bonds of companies with the highest junk ratings are poised to thrive in an economy that may slow as the Fed begins withdrawing a record $1 trillion in excess cash that propped up the banking system during the recession.
‘Sweet Spot’
“BBs in particular are the sweet spot for a slow recovery environment,” said Goldman Sachs strategist Gallo, who said investors in the bonds will benefit as the Fed keeps interest rates low to guard against another slump, while foreign investors seek higher yielding assets that offer a cushion against another slowdown.
Goldman Sachs, based in New York, estimates that the economy will grow at 2.6 percent in 2010, below the 3 percent median forecast, Bloomberg data show.
While Moody’s said the speculative-grade default rate will decline to 2.9 percent by the end of the year from a record 12.9 percent in November, companies with the lowest rankings will need a strong recovery to reduce debt and avoid default, Gallo said.
Fed officials said they planned to keep the main overnight interest rate near zero for an “extended period” after meeting on March 16.
Monday, April 5, 2010
Office vacancy rate hits 16-year high
(Reuters) - The U.S. office vacancy rate in the first quarter reached its highest level in 16 years, but the decline in rents eased and crept closer to stabilization, according to a report by real estate research firm Reis Inc.
U.S. | Housing Market
The U.S. office vacancy rate rose to 17.2 percent, a level unseen since 1994, as the market lost about 11.6 million net square feet of occupied space during the first quarter, according to the report released on Monday. The U.S. vacancy rate inched up 0.2 percentage points from a quarter earlier and was 2 percent higher than a year ago.
"As labor markets stabilize, we expect occupancies and rents to require another 12 to 18 months before showing signs of improvement, given typical lags in commercial real estate," Reis director of research Victor Calanog said in a statement. "Even as occupancy continues to deteriorate, we're observing signs of renewed leasing activity across different metros."
The U.S. office vacancy rate hit a cyclical low of 12.5 percent in the third quarter 2007.
Rental rates fell an average of 0.8 percent in the first quarter, a less steep decline that seen last year. Asking rent fell 4.2 percent from a year earlier. Factoring months of free rent and landlord contributions to space improvements for each tenant, effective rent was down 7.4 percent from a year earlier.
Both asking and effective rent were off 0.8 percent from the fourth quarter 2009. The fact that effective rent is no longer falling at a greater rate than asking rent is an indication that landlords may have offered enough concessions to stimulate leasing activity.
"While we do not foresee positive rent growth resuming until next year at the earliest, office buildings at least do not seem to be experiencing as much distress relative to 12 months ago, when we were just heading into 2009 and most markets and economies around the world were still in deep turmoil," Calanog said.
LESS OF A BLOODBATH IN 2010
"We expect less of a bloodbath in fundamentals in 2010 versus 2009, but rents will still decline and vacancies will still continue to rise," Calanog said. "This is bad news for loans supported by office properties that have to contend with at least six to eight more quarters of falling income."
Tight credit markets also have curbed office construction with only 3.6 million square feet of office space coming online, the lowest level of completions since Reis began publishing quarterly data in 1999.
The office vacancy rate increased in 57 of the 79 primary metropolitan areas Reis tracks. Effective rents fell in 56 out of 79 markets, down from 70 in the fourth quarter 2009.
New York, the largest office market, saw its vacancy rate rise 0.1 percentage point to 11.7 percent from 11.6 percent. Effective rent slid 2.1 percent, less than half the 5.3 percent drop seen in the fourth quarter 2009.
Washington DC has overtaken New York as Reis's tightest market, with DC sporting the nation's lowest vacancy rate of 10.4 percent. Detroit, home of the U.S. auto industry, continued to suffer the most, with a 26.2 percent vacancy rate, the highest in the nation.
Oil Jumps to Over $86 on Strong US Jobs Data
Reuters
04/05/2010
U.S. crude futures hit an 18-month high on Monday, climbing above $86 per barrel on expectations of faster-than-expected economic recovery and increasing demand for fuel.
Data on Friday showed U.S. employers created jobs in March at the fastest rate in three years. Non-farm payrolls rose 162,000, only the third increase since the U.S. economy fell into recession in late 2007 and the largest since March 2007.
U.S. manufacturing is also expanding at its fastest pace for more than five years, while Chinese manufacturing is picking up and Japanese business sentiment is also improving.
U.S. light, sweet crude oil for May delivery rose more than $1 to above $86 a barrel. The market was closed for a three-day weekend including the Good Friday holiday.
U.S. crude has risen almost 2 percent in the first five days of the quarter, versus a rise of 5.5 percent through the whole of the first three months of the year.
The strong payrolls, positive manufacturing data and signs of rising fuel demand are all likely to support oil prices and cement crude in a new, higher range, analysts say.
'Little Resistance'
Technical analysts, who follow the movement of prices on historical charts, have become more bullish and suggest the oil market could move higher in the next few weeks.
"Our take on crude oil prices in the short-term is that we likely will push higher from here," said senior commodities analyst Edward Meir at brokers MF Global. "Technically, there is very little resistance showing on the charts given the upside breakout evident."
In industry news, U.S. Tesoro [TSO 13.57 -0.82 (-5.7%) ] said on Sunday crude oil intake at its Anacortes, Washington, refinery was down to about 70 percent of its 120,000 barrel per day (bpd) capacity after a deadly explosion and fire on Friday.
Sustained demand for gas oil has triggered a surge in buying of crudes with high yields of gas oil and diesel in the Asia-Pacific market as demand led by Chinese buyers absorbed May-loading supplies.
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