Piper Jaffray Companies (PJC)
Q2 2013 Earnings Call
July 17, 2013 9:00 am ET
Andrew S. Duff - Chairman and Chief Executive Officer
Debbra L. Schoneman - Chief Financial Officer, Principal Accounting Officer and Managing Director
Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division
Michael Wong - Morningstar Inc., Research Division
Brian Hagler - Kennedy Capital Management, Inc.
Previous Statements by PJC
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The company has asked that I remind you, statements on this call that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements that involve inherent risks and uncertainties. Factors that could cause actual results to differ materially from those anticipated are identified in the company's earnings release and reports on file with the SEC, which are available on the company's website at www.piperjaffray.com and on the SEC website at www.sec.gov.
As a reminder, this call is being recorded.
And now I'd like to turn the call over to Mr. Andrew Duff. Mr. Duff, you may begin your call.
Andrew S. Duff
Good morning, and thank you for joining us to review our second quarter results. I will spend a few minutes discussing the market environment and performance of our business and then hand the call over to Deb to review our financial results.
Overall, we experienced a mixed environment in this -- in the markets this quarter. On the favorable side, equity markets built on their strong first quarter performance. The S&P index was up 3% for the quarter and 13% for the first half of the year. Our equity-related and asset management businesses benefited from these accommodative market conditions. Stronger equity markets do not appear to have much impact on the M&A activities during the quarter.
In public finance, interest rates remain attractive to new issuers and we continue to see healthy investor appetite for new municipal debt offerings. The fixed income trading markets, however, experienced turbulent conditions, which adversely impacted our institutional brokerage results for the quarter. Late in the quarter, the Federal Reserve signaled its intentions to curtail its quantitative easing program later this year. The reaction across fixed income markets was both immediate and substantial. The 10-year Treasury, for example, traded around 1.6 in early May. Post the announcement, it traded at 2.6, representing a rate increase of over 60%.
The volatile conditions across fixed income markets were even more pronounced in the municipal bond market. With market making and municipal bonds a core part of our franchise, overall results were negatively impacted by the abruptness and magnitude of the change in municipal bond pricing. We have a long history in this business, and the movements in rates towards the end of the quarter was the most dramatic we have experienced in over 25 years. This proportionate impact on municipal bonds was a result of both an increase in rates and the widening of credit spreads and reflected market conditions particular to this asset class.
Over the past several months, municipal bonds funds have experienced accelerating outflows culminating in outflows of $13.5 billion in June, the second-largest monthly outflow on record. Demand for bonds in the secondary market have been light as investors sat on the sidelines expecting an increase in rates. The Federal Reserve announcement put additional pressure on this market, which manifested itself with widening credit spreads.
As we entered the second quarter, our operating assumption called for gradually rising interest rates throughout the year. With this perspective, we reduced inventory levels and adjusted our hedging strategies accordingly. These steps helped mitigate the impact from abrupt increases in rates but they could not completely protect us from the marks on the remaining inventories. These marks materially impacted our fixed income brokerage results for the quarter.
Since the end of the quarter, we have seen market conditions stabilizing. We have not changed our operating assessment that interest rates will tend upward. As markets with the various asset classes gradually find their new equilibrium, however, we might see some rates easing in the near term. We review and assess our exposure on a continuous basis in order to adapt to a more defensive posture in this environment with respect to our inventory levels and hedging strategies. Nevertheless, we will continue to look for opportunities to deploy additional capital selectively during these periods of market instability. In fact, at the height of the market's dislocation, we deployed additional capital targeted to where we saw unique buying opportunities.
Moving on to the other part of our fixed income business. Our municipal debt underwriting business produced strong results for the quarter despite market volatility and the rise in interest rates. We continued to benefit from the geographic expansion which we have undertaken in the past couple of years. Our acquisition of Seattle-Northwest Securities, which closed last week, represents an integral part of the geographic expansion. The firm was founded in 1970 and is the leading middle market public finance firm in the Pacific Northwest. Last year, in terms of number of deals, it was the top underwriter in Washington, Oregon and Idaho. Our combination with Seattle-Northwest represents a great strategic fit for both firms. It will benefit from their leading market share in the Pacific Northwest and additional distribution and trading resources. Seattle-Northwest customers will benefit from our broader set of products, more extensive distribution capabilities and deeper capital base. We are very excited to have this talented group join Piper Jaffray.