It looks as if we’ve finally seen an end to the euphoria which characterized the opening of the year.
What the Federal Reserve gave when it surprised the market with an intra-meeting 50 basis point rate cut in early January is being slowly but surely taken away by predictions of a return to a less volatile period in the business cycle.
Fed Chairman Alan Greenspan basically told the Senate Banking Committee Tuesday that the crisis atmosphere that precipitated the two 50 basis point rate cuts in January was fading. The current economic correction should be short-lived enough to bring the economy back to an annual growth rate as high as 2.5 percent by year end.
Such a growth rate may be nothing to crow about, but the prediction implies that the economy will again perform impressively by the second half of the year, even if only enough to make up for the current doldrums.
Friday’s release of the Producer Price Index had a similar effect. The overall index rose by 1.1 percent, about four times the level forecast by most economists, while the “core” figure, which excludes food and energy, rose by 0.7 percent, versus a consensus of 0.1 percent.
Market Reactions Muted
A Fed 25 basis point rate cut is priced in throughout debt and equity markets for the next Federal Open Market Committee meeting on March 20, and no one is predicting any monetary action before that.
The upshot, as far as the capital markets are concerned, is an effective end to the betting on a major downward shift in bond yields.
Accordingly, look for different debt securities to more or less behave in accord with their individual or sector merits, with little or no background noise from Fed watchers and economic number crunchers.
Investment-grade debt has stabilized overall, following a widening out at the beginning of the month, when the market suddenly woke up and realized that there had been more of this paper printed in January than during any other month in history.
The exception here has also been driven at least in part by supply concerns.
Telecommunications debt starts this week some 12 basis points wider relative to Treasuries than it had been one week prior. In addition to the general skepticism pervading the sector, warning bells and whistles went off with Thursday’s announcement that AT&T Wireless Corp. will be issuing some $4 billion to $5 billion of five-, 10-, and 30-year (Baa2) paper at the end of the month via Merrill Lynch and Salomon Smith Barney.
In the equity market, the concern over this deal is being echoed in the reception that awaits an upcoming spin-off from Lucent Technologies, the ailing telecom equipment giant that itself was spun off from AT&T in the mid-1990s.
For the past year, Lucent has dumped assets as its financial health worsened. The company hopes to raise some $7.4 billion through its initial public offering of Agere Systems. But the deal’s prospects are clouded by the general weakness in the telecom sector and the extra taint borne by firms with ties to AT&T and Lucent.
Low Issuance in Shortened Week
Looking ahead, while all market sectors look to be relatively slow during the four-day week, there are some issues looming.
In investment grade, the forward spin is dominated by the speculation concerning the upcoming AT&T Wireless offer, which will price some time after the conclusion of the deal’s road show on Feb. 27.
Other names still floating around include Northrup Grumman, which plans to raise $1 billion to repay some of the financing of its $5.1 billion purchase of Litton Industries. Tyson Foods is likely to issue as much as $2 billion of senior unsecured bonds to repay commercial paper it took out to buy beef processor IBP.
The junk pipeline is also devoid of new names.
Among the issuers expected to surface over the next couple of weeks are AEA Investors and DLJ Merchant Banking Partners, which jointly plan to sell up to $275 million of bonds to partly finance their buyout of BF Goodrich Performance Materials. First Reserve Corp. and Odyssey Investment Partners plan $250 million of 10-year notes via Morgan Stanley Dean Witter.
IPOs are seeing “the quietest market on a year-over-year basis that I can remember,” says Michelle Patropoulos of Williams Capital Group.
Most market watchers are pinning their hopes for a return to big-time IPOs on the Agere Systems deal, but even this is suspect while parent Lucent Technologies is absorbed with solving its growing list of problems. This past week, things began to look even worse when the Securities and Exchange Commission opened an inquiry into the company’s accounting practices.
With the Agere IPO still ahead, no one is saying for sure whether the firm’s association with Lucent will help or hinder the stock offering.
“At some point there’s value, but Lucent’s a tough one to call,” said Patropoulos.
In the meantime, a few stock offerings are slated for the coming week: