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US Treasury yields were higher across the curve with the 2Y and 5Y yields up 6-7bps for a second straight day. Both US President Joe Biden and Republican House Leader Kevin McCarthy expressed optimism that a deal will soon be struck to lift the $31.4trn debt ceiling, thereby avoiding a potential government default from June 1. Market sentiment thus improved on growing hopes for a debt ceiling agreement. The peak Fed Funds Rate was flat at 5.13% with markets expecting no change in the Fed’s policy meeting in June. However, the probability of a 25bp rate hike has risen to 24% vs. 0% a week ago. Equity indices closed higher with the S&P and Nasdaq up 1.2-1.3%. US IG CDS spreads tightened by 3.1bp and HY CDS spreads tightened by 12.7bp.
European equity markets ended higher too. European main CDS spreads were 0.2bp tighter and crossover CDS spreads were 1.8bp tighter. Asia ex-Japan CDS spreads tightened by 0.31bp. Asian equity markets have opened in the green today.
EDF raised $3bn via a three-part deal. It raised:
The bonds have expected ratings of Baa1/BBB/BBB+. Proceeds will be used for general corporate purposes.
Aldar Investment raised $500mn via a 10Y Green Sukuk at a yield of 5.038%, 35bp inside initial guidance of T+185bp area. The bonds have expected ratings of Baa1 (Moody’s). Proceeds will be used to finance, refinance and/or invest in eligible green projects, as set out in Aldar’s green framework.
Korea Credit Guarantee Fund raised $300mn via a 3Y Social bond at a yield of 4.954%, 35bp inside initial guidance of T+155bp area. The bonds have expected ratings of Aa2/AA. Proceeds will be used to finance and/or refinance eligible social projects in accordance with the KODIT sustainability framework.
Deutsche Bank Outlook Revised To Positive On Strengthening Resilience And Performance; Ratings Affirmed
Samurai bonds are yen-denominated bonds issued by foreign entities in Japan. These bonds, which are subject to bond market regulations in Japan, are issued by foreign countries and corporations to attract Japanese investors. Another reason to issue Samurai bonds is to capitalize on lower interest rates in Japan compared to the issuer’s local market.
On Debt-Ceiling Tail Hedges Being ‘Cheap Lottery Tickets’
BofA strategists
“Various asset classes remain seemingly calm about the current (arguably riskier) situation. We therefore find it sensible to buy S&P and gold hedges”
Rich Weiss, CIO of multi-asset strategies at American Century Investment Management
“We’re not going to try to get too cute about what may or may not happen here. We’re already defensively positioned. That’s about as good as you could do”
On US ‘Probably’ Won’t Default on Debts – JPMorgan’s Jamie Dimon
“The US should not and probably will not default… Whatever it is, we will be prepared… I asked them to make sure that they tell everybody that default should not be an option”
On Fed to keep rates untouched this year; risk of US default high
Michael Gapen chief US economist at BofA
“Put simply, inflation is more than double the Fed’s target rate and the unemployment rate is below every FOMC participant’s estimate of the natural rate. These facts alone suggest the Fed’s bias would be to hike rather than cut… rather than lean against a mild recession, the Fed would view it as an acceptable price for bringing inflation back down to target”
Michael Gregory, deputy chief economist at BMO Capital Markets
“No matter how you slice it, the U.S. faces tough choices to bring its fiscal house in order. However, further political brinkmanship – or even worse, failure to raise the debt limit – would be like adding salt to the wound”