Friday, May 4, 2012

The strange reality of the current rate and spread environment


LCDNews: - U.S. Bancorp launched a $1.25 billion offering of SEC-registered, five-year medium-term notes at T [treasury] +87.5, or the narrow end of initial guidance in the T+90 area, sources said.
U.S. Bancorp is a strong, Aa3/AA- rated bank. It makes sense that it should be able to issue debt at T+87.5. But let's step back for a second. By buying this note, you are taking bank risk for 5 years to get paid 1.69% in total per year (no collateral, no FDIC protection, etc.) About a 35 basis point increase in either rate or spread will wipe out one year's worth of interest. Another flare up in Europe or slightly stronger inflation expectations and the bond is under water. Doesn't look like a great risk/reward situation. But this is the strange reality of the current rate and spread environment. What's amazing is that the older U.S. Bancorp, the one maturing in 4 years, is trading at T+64, or yield of 1.46% (yes, per year).



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