GE's IRM team provides risk management solutions and arranges
hedging transactions for GE corporate borrowers.
We offer:
Certainty of interest expense
- execution of a hedge
mitigates the risk of rising
rates
An efficient tool for managing
risk - Transactions can be
tailored to meet specific
borrower requirements
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.
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.