Friday, May 06, 2005
Leading car companies are cut to junk
General Motors and Ford, two of America's industrial icons, were downgraded to junk status on Thursday amid mounting concerns about their ability to stem losses in the intensely competitive US car and truck market.
Standard & Poor's, the credit rating agency, said the downgrades reflected anxieties about the survival strategies at the two companies, which face a healthcare cost crisis as well as falling sales of sports-utility vehicles, their most profitable lines.
“There's just been a pile-up of one negative development after another over the last six months,” said Scott Sprinzen, auto analyst at S&P.
The downgrades, although anticipated, may signal a tightening of credit conditions after a period of easy borrowing. When the second and third biggest corporate borrower in the world goes to junk, it is not just they that have a problem, we all have a problem.
Some investment-grade bond funds could be forced to sell their holdings while the arrival of so much formerly investment-grade debt in the much smaller high-yield market could create disruption. There will be exposure everywhere. This is a real test of what the market can take.
For Ford and GM, junk status will raise their cost of borrowing, an additional burden for the struggling manufacturers.
S&P said its biggest concern was the slip in demand for the biggest SUVs, as petrol prices rise. Both Ford and GM were “heavily reliant” on large SUVs for their profits, the agency said. Sales of the biggest SUVs fell by a fifth in the first three months of the year.
GM said it was “disappointed” by S&P's move. Ford “disagreed” with it. Both companies pointed out they had substantial cash piles.
Largely because of slowing SUV sales, GM's market share in the US dropped to 25.2 per cent in April from 27.7 per cent a year earlier. Ford's share slipped to 17.5 per cent from 18.8 per cent.
At their peak 40 years ago, GM, Ford and their smaller Detroit-based rival, Chrysler, made nine out of every 10 cars and trucks sold in the US.
Last month GM revealed a $1.1bn quarterly loss, its biggest since 1992, when the carmaker was on the brink of bankruptcy. Rick Wagoner, chief executive, has taken personal responsibility for efforts to turn round the north American operations. On Wednesday shares in GM rallied on word that Kirk Kerkorian's Tracinda had offered to increase its stake to 9 per cent.
Shares in GM closed down 5.9 per cent to $30.86. Ford fell 4.5 per cent at $9.70. Delphi and Visteon, parts makers that depend heavily on GM and Ford respectively, also tumbled, by about 7 per cent and 5 per cent respectively. GM's and Ford's longest-dated bonds fell about 10 per cent.
GM was downgraded two notches, from BBB-/A-3 to BB/B-1. Ford was cut to BB+/B-1. Both companies remain on negative outlook.
Standard & Poor's, the credit rating agency, said the downgrades reflected anxieties about the survival strategies at the two companies, which face a healthcare cost crisis as well as falling sales of sports-utility vehicles, their most profitable lines.
“There's just been a pile-up of one negative development after another over the last six months,” said Scott Sprinzen, auto analyst at S&P.
The downgrades, although anticipated, may signal a tightening of credit conditions after a period of easy borrowing. When the second and third biggest corporate borrower in the world goes to junk, it is not just they that have a problem, we all have a problem.
Some investment-grade bond funds could be forced to sell their holdings while the arrival of so much formerly investment-grade debt in the much smaller high-yield market could create disruption. There will be exposure everywhere. This is a real test of what the market can take.
For Ford and GM, junk status will raise their cost of borrowing, an additional burden for the struggling manufacturers.
S&P said its biggest concern was the slip in demand for the biggest SUVs, as petrol prices rise. Both Ford and GM were “heavily reliant” on large SUVs for their profits, the agency said. Sales of the biggest SUVs fell by a fifth in the first three months of the year.
GM said it was “disappointed” by S&P's move. Ford “disagreed” with it. Both companies pointed out they had substantial cash piles.
Largely because of slowing SUV sales, GM's market share in the US dropped to 25.2 per cent in April from 27.7 per cent a year earlier. Ford's share slipped to 17.5 per cent from 18.8 per cent.
At their peak 40 years ago, GM, Ford and their smaller Detroit-based rival, Chrysler, made nine out of every 10 cars and trucks sold in the US.
Last month GM revealed a $1.1bn quarterly loss, its biggest since 1992, when the carmaker was on the brink of bankruptcy. Rick Wagoner, chief executive, has taken personal responsibility for efforts to turn round the north American operations. On Wednesday shares in GM rallied on word that Kirk Kerkorian's Tracinda had offered to increase its stake to 9 per cent.
Shares in GM closed down 5.9 per cent to $30.86. Ford fell 4.5 per cent at $9.70. Delphi and Visteon, parts makers that depend heavily on GM and Ford respectively, also tumbled, by about 7 per cent and 5 per cent respectively. GM's and Ford's longest-dated bonds fell about 10 per cent.
GM was downgraded two notches, from BBB-/A-3 to BB/B-1. Ford was cut to BB+/B-1. Both companies remain on negative outlook.
# posted by Dr Search- Principal Consultant at the Search Clinic @ 8:05 AM 0 comments
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Thursday, May 05, 2005
US Treasury to reintroduce 30 year bonds
The US Treasury surprised the markets by announcing it was considering reissuing 30-year bonds - a move that would reverse a decision made in 2001 to concentrate on shorter maturities.
Government officials denied the change was triggered by the need to fund rising US debt or to support pension system reform.
"This is about diversifying our portfolio, increasing flexibility and widening the investor base," said Tony Fratto, Treasury spokesman. "This decision in no way has anything to do with deficits or prospective costs that may be associated with social security reform."
However, the surprise announcement comes as the Bush administration is pushing for social security reform - including the introduction of personal investment accounts using diverted payroll taxes - which could cost billions of dollars.
It highlights the degree to which America's fiscal position has deteriorated since 2001, when it abandoned the bonds claiming that they were no longer needed because the deficit was shrinking.
It also comes amid growing demand from pension funds for long-term assets, not least because there is rising regulatory pressure on them to match assets more closely to liabilities as populations age.
These pressures have already prompted a number of European governments to issue long-term bonds this year. The US Treasury's decision will not be announced until August.
If the US does proceed, the bonds could be sold again early next year, officials said. They expect that annual issuance of $20-30bn would be sufficient to create a liquid market.
The announcement pushed prices for previously issued 30-year bonds down almost two full points, sending surging to 4.59 per cent from 4.49 the previous day.
The yield curve steepened sharply, with the gap between 10 and 30-year yields widening to 40 basis points from 31 basis points on Tuesday.
The announcement was welcomed by the Chicago Board of Trade, which last week said it was planning an initial public offering. Any re-issuance of the 30-year bond is likely to boost its business significantly because the 30-year contract was one of its busiest contracts until 2001.
Charles Carey, CBOT chairman, predicted a multitude of benefits. "A liquid market for debt across the entire yield curve would lower risk profiles for long-term investors and would serve an important role in the pricing of other long-term debt instruments," he said.
Government officials denied the change was triggered by the need to fund rising US debt or to support pension system reform.
"This is about diversifying our portfolio, increasing flexibility and widening the investor base," said Tony Fratto, Treasury spokesman. "This decision in no way has anything to do with deficits or prospective costs that may be associated with social security reform."
However, the surprise announcement comes as the Bush administration is pushing for social security reform - including the introduction of personal investment accounts using diverted payroll taxes - which could cost billions of dollars.
It highlights the degree to which America's fiscal position has deteriorated since 2001, when it abandoned the bonds claiming that they were no longer needed because the deficit was shrinking.
It also comes amid growing demand from pension funds for long-term assets, not least because there is rising regulatory pressure on them to match assets more closely to liabilities as populations age.
These pressures have already prompted a number of European governments to issue long-term bonds this year. The US Treasury's decision will not be announced until August.
If the US does proceed, the bonds could be sold again early next year, officials said. They expect that annual issuance of $20-30bn would be sufficient to create a liquid market.
The announcement pushed prices for previously issued 30-year bonds down almost two full points, sending surging to 4.59 per cent from 4.49 the previous day.
The yield curve steepened sharply, with the gap between 10 and 30-year yields widening to 40 basis points from 31 basis points on Tuesday.
The announcement was welcomed by the Chicago Board of Trade, which last week said it was planning an initial public offering. Any re-issuance of the 30-year bond is likely to boost its business significantly because the 30-year contract was one of its busiest contracts until 2001.
Charles Carey, CBOT chairman, predicted a multitude of benefits. "A liquid market for debt across the entire yield curve would lower risk profiles for long-term investors and would serve an important role in the pricing of other long-term debt instruments," he said.
# posted by Dr Search- Principal Consultant at the Search Clinic @ 9:22 AM 0 comments
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Wednesday, May 04, 2005
US interest rates rise 0.25% to 3%
In coming months, consumers can expect more of what they have seen for nearly a year -a gradual increase in interest rates controlled by the Federal Reserve.
That was the message delivered by the Fed when on Tuesday policy-makers for the eighth time increased a key interest rate by a quarter-point, pushing the federal funds rate up to 3 percent.
That increase was immediately matched by a quarter-point increase in commercial banks' prime lending rate, the benchmark rate for millions of consumer and business loans, which moved up to 6 percent, the highest that rate has been since the autumn of 2001.
The latest Fed action came despite the fact that the economy has slowed in recent weeks under the weight of rising energy prices.
The Fed took note of the slowdown in the statement explaining its action Tuesday, saying that "recent data suggest that the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices."
But the Fed also noted that "pressures on inflation have picked up in recent months and pricing power is more evident."
Analysts say Federal Reserve Chairman Alan Greenspan and his colleagues, are caught between a slowing economy and rising inflation- and have decided to worry more about inflation.
The Fed is seeking to move rates up from the unusually low levels where they were pushed to jump-start the economy in the wake of the 2001 recession and the extended jobless recovery that followed. The funds rate was at a 46-year low of 1 percent last year before the Fed started tightening credit.
Financial markets took a tumble for a while after the Fed announcement, believing that the central bank had raised its worry level about inflation, meaning a more aggressive rate-increase campaign in the months ahead.
However, in a rare goof, the Fed announced nearly two hours after the initial statement that it had inadvertently left out a key sentence stating, "Longer-term inflation expectations remain well contained."
The Dow Jones industrial average was down 46 points five minutes before the closing bell. But when that news reached investors, it sparked a rally and the Dow finished the day up 5.25 points at 10,256.95.
In its statement, the Fed retained a phrase it has been using for a year now that it expected to be able to raise rates at a "pace that is likely to be measured," another signal that it planned on sticking with its quarter-point moves.
While the prime rate and other short-term rates controlled by the Fed have been steadily increasing, long-term rates set by market forces have stayed low. Treasury's benchmark 10-year note actually fell to 4.17 percent after the Fed announcement Tuesday, from 4.19 percent the day before.
Long-term rates are being influenced by such factors as the recent weakness in economic growth, with the overall economy growing at just 3.1 percent in the January-March quarter, the slowest pace in two years. But analysts predicted those rates will be rising in the months ahead if the current slowdown proves temporary, as they are forecasting.
Many analysts believe 30-year mortgage rates, which dropped for a fourth-consecutive week to 5.78 percent last week, will begin rising in the months ahead and will likely end the year around 6.5 percent, still low enough to likely keep sales of both new and existing homes near last year's record levels.
That was the message delivered by the Fed when on Tuesday policy-makers for the eighth time increased a key interest rate by a quarter-point, pushing the federal funds rate up to 3 percent.
That increase was immediately matched by a quarter-point increase in commercial banks' prime lending rate, the benchmark rate for millions of consumer and business loans, which moved up to 6 percent, the highest that rate has been since the autumn of 2001.
The latest Fed action came despite the fact that the economy has slowed in recent weeks under the weight of rising energy prices.
The Fed took note of the slowdown in the statement explaining its action Tuesday, saying that "recent data suggest that the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices."
But the Fed also noted that "pressures on inflation have picked up in recent months and pricing power is more evident."
Analysts say Federal Reserve Chairman Alan Greenspan and his colleagues, are caught between a slowing economy and rising inflation- and have decided to worry more about inflation.
The Fed is seeking to move rates up from the unusually low levels where they were pushed to jump-start the economy in the wake of the 2001 recession and the extended jobless recovery that followed. The funds rate was at a 46-year low of 1 percent last year before the Fed started tightening credit.
Financial markets took a tumble for a while after the Fed announcement, believing that the central bank had raised its worry level about inflation, meaning a more aggressive rate-increase campaign in the months ahead.
However, in a rare goof, the Fed announced nearly two hours after the initial statement that it had inadvertently left out a key sentence stating, "Longer-term inflation expectations remain well contained."
The Dow Jones industrial average was down 46 points five minutes before the closing bell. But when that news reached investors, it sparked a rally and the Dow finished the day up 5.25 points at 10,256.95.
In its statement, the Fed retained a phrase it has been using for a year now that it expected to be able to raise rates at a "pace that is likely to be measured," another signal that it planned on sticking with its quarter-point moves.
While the prime rate and other short-term rates controlled by the Fed have been steadily increasing, long-term rates set by market forces have stayed low. Treasury's benchmark 10-year note actually fell to 4.17 percent after the Fed announcement Tuesday, from 4.19 percent the day before.
Long-term rates are being influenced by such factors as the recent weakness in economic growth, with the overall economy growing at just 3.1 percent in the January-March quarter, the slowest pace in two years. But analysts predicted those rates will be rising in the months ahead if the current slowdown proves temporary, as they are forecasting.
Many analysts believe 30-year mortgage rates, which dropped for a fourth-consecutive week to 5.78 percent last week, will begin rising in the months ahead and will likely end the year around 6.5 percent, still low enough to likely keep sales of both new and existing homes near last year's record levels.
# posted by Dr Search- Principal Consultant at the Search Clinic @ 3:31 PM 0 comments
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Tuesday, May 03, 2005
Fed expected to increase rates by 0.25%
The Federal Reserve Chairman Alan Greenspan and his colleagues are being buffeted by strong economic crosscurrents rising inflation pressures on one hand and a sudden slowing in economic growth on the other.
Faced with conflicting forces, the Fed is still expected to stay the course, raising interest rates by a moderate quarter-point on Tuesday, the eighth such increase since the central bank embarked on the current credit-tightening campaign last June.
Such a move would push the target for the funds rate, the interest that banks charge each other on overnight loans, from the current 2.75 percent to 3 percent. When the Fed started boosting rates 10 months ago, the funds rate stood at 1 percent, the lowest level in 46 years.
The increase in the funds rate is expected to trigger a corresponding quarter-point increase in banks' prime lending rate, the benchmark for millions of business and consumer loans. The prime rate now stands at 5.5 percent.
Analysts believe that given the current economic uncertainty, the Fed will not only stick to another quarter-point rate increase but will also make few changes in the wording of the statement announcing the action.
The expectation is that the Fed, as it has been doing for a year, will pledge to make any further rate increases at a "measured" pace, which has come to mean further quarter-point moves.
The steady-as-she-goes prediction is a far cry from the expectations about the Fed's next moves that were being made immediately after its last meeting on March 22.
At that time, Wall Street began bracing for the Fed to ditch the promise to be measured and jack up rates by a half-point. That fear of more aggressive Fed credit-tightening was fanned by a change of wording in the March Fed statement to acknowledge more worries about inflation.
Faced with conflicting forces, the Fed is still expected to stay the course, raising interest rates by a moderate quarter-point on Tuesday, the eighth such increase since the central bank embarked on the current credit-tightening campaign last June.
Such a move would push the target for the funds rate, the interest that banks charge each other on overnight loans, from the current 2.75 percent to 3 percent. When the Fed started boosting rates 10 months ago, the funds rate stood at 1 percent, the lowest level in 46 years.
The increase in the funds rate is expected to trigger a corresponding quarter-point increase in banks' prime lending rate, the benchmark for millions of business and consumer loans. The prime rate now stands at 5.5 percent.
Analysts believe that given the current economic uncertainty, the Fed will not only stick to another quarter-point rate increase but will also make few changes in the wording of the statement announcing the action.
The expectation is that the Fed, as it has been doing for a year, will pledge to make any further rate increases at a "measured" pace, which has come to mean further quarter-point moves.
The steady-as-she-goes prediction is a far cry from the expectations about the Fed's next moves that were being made immediately after its last meeting on March 22.
At that time, Wall Street began bracing for the Fed to ditch the promise to be measured and jack up rates by a half-point. That fear of more aggressive Fed credit-tightening was fanned by a change of wording in the March Fed statement to acknowledge more worries about inflation.
# posted by Dr Search- Principal Consultant at the Search Clinic @ 10:13 AM 0 comments
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