GE Capital

GE Capital

GE Capital
Current Dynamics
Short-term U.S. Treasury yields and swap rates fell to record low levels in August after the Federal Reserve announced it would provide additional stimulus to confront slowing economic conditions.  Since June, U.S. Treasury yields and swap rates have fallen amid greater uncertainty over the economic outlook as subdued inflation conditions combined with several weak economic data releases.  The latest path lower in rates gained momentum In May as Europe's fiscal developments led to significant risk aversion.  Rates are sharply lower for 2010 so far, beginning with a decline in April, amid Europe's fiscal crisis and the Fed's pledge to keep rates exceptionally low. 
 
  • Libor:  On September 2, one and three-month U.S. Libor set at 0.25781% and 0.29438% respectively.  According to the futures market, three-month Libor is expected to end 2010, 2011 and 2012 at 0.42%, 0.87% and 1.60% respectively.  One and three-month Libor are a respective 433 and 452 bps lower than their October 2008 crisis peak following government support to the financial system.    
     
  • Fed Policy:  On August 27, Fed Chairman Bernanke said "falling into deflation is not a significant risk for the United States at this time, but that is true in part because the public understands that the Federal Reserve will be vigilant and proactive in addressing significant further disinflation."  To help support the recovery, the FOMC announced on August 10 that it "will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities." 
     
  • Economic Indicators:  Recent U.S. data releases showed that in August, activity in the manufacturing sector (ISM) expanded for a 13th consecutive month while consumer confidence increased mildly from a 5-month low.  In July, new home sales fell nearly 12.5%, existing home sales plunged over 27%, capacity utilization reached its highest level in 21 months, retail sales increased for the 1st time since April, consumer prices increased for the 1st time in 4 months but the gains remain subdued, there was a 7th straight month of private sector job creation, however, the latest figures were disappointing and the unemployment rate held steady at 9.5%.   Also in July, economic activity in the services sector (ISM NM) expanded for a 7th straight month.   In June, business inventories increased 0.3% as sales fell 0.6%.  In Q2, real GDP increased at a slower 1.6% annual rate and consumer spending rose at a 2% pace.  
 
Deflation risk: Concerns over the potential for a U.S. deflationary cycle have risen dramatically over the summer due to the recent slowing in economic growth, weakening in home sales and undesirably high unemployment occurring alongside an already subdued inflation backdrop. 

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Risk appetite: A significant increase in risk aversion during May and late June contributed to the recent decline in U.S. Treasury yields.  June's 5.4% decline in the S&P 500 index follows May's 8.2% drop and is consistent with a downgraded near-term U.S. economic outlook.  

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