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US Treasury yields were marginally lower across the medium and long-term tenors on Friday. The US Treasury’s $16bn 20Y bond auction was met with stronger than expected demand. The final yield on the auction stopped through by 1bp at 4.78% and the bid-to-cover came at 2.58x, slightly higher than the average of 2.52x. Also primary dealers who take-up the supply not taken by bidders, took 9.5% of the issue, compared to the 11.9% take-up seen last month for the bonds, indicating healthy demand. The Peak Fed Funds Rate was higher by 1bp. US credit markets saw IG CDS spreads tighten 0.8bp and HY spreads tighten by 5.5bp. S&P rose and Nasdaq rallied by 0.7% and 1.1% respectively.
European equity markets were stable. In credit markets, European main CDS spreads were tighter by 1.2bp and crossover spreads tightened by 6bp. Asian equity markets have opened in the green today and Asia ex-Japan IG CDS spreads were tighter by 5.8bp.
Intesa Sanpaolo raised $3bn via a two-part senior preferred deal. It raised $1.5bn via a 10Y bond at a yield of 7.214%, 30bp inside initial guidance of T+310bp area. It also raised $1.5bn via a 30Y bond at a yield of 7.82%, 20bp inside initial guidance of T+345bp area. The new 10Y notes offer a new issue premium of 4.4bp over its existing 6.625% 2033s that yield 7.17%. The bonds have expected ratings of Baa1/BBB/BBB. Proceeds will be used for general corporate purposes.
Credit Agricole raised €1.25bn via a 10Y green senior non-preferred bond at a yield of 4.429%, 35bp inside initial guidance of MS+170bp area. The bonds have expected ratings of A3/A-/A+, and received orders over €5.7bn, 4.6x issue size. The bonds also have a 75% clean-up call. Proceeds will be used to finance/refinance, eligible assets of Credit Agricole Group and its subsidiaries as defined by its Green Bond Framework.
Ford raised €750mn via a 5.2Y bond at a yield of 5.179%, 30bp inside initial guidance of MS+240bp area. The senior unsecured bonds have expected ratings of Ba1/BBB-/BBB-. Proceeds will be used for general corporate purposes.
NAB raised $1.75bn via a 5Y covered bond at a yield of 5.134%. The bonds have expected ratings of Aaa/AAA (Moody’s/Fitch) and are guaranteed by Perpetual Corporate Trust Ltd. Proceeds will be used for general corporate purposes.
Covered bonds are senior secured debt instruments that are typically issued by banks. These bonds are secured (i.e. covered) by a pool of assets referred to as the “cover pool”, which typically consists of mortgages or loans. In an event that the bank defaults, holders of covered bonds have a preferential claim to the cover pool, which ensures interest payments and repayment of principal. This makes covered bonds relatively more secure vs. other debt and therefore results in a higher credit rating. While they have similarities with Mortgage-Backed Securities (MBS) in terms of the pool of assets there is a difference – the transfer of mortgages to an Special Purpose Entity (SPE) in a MBS issue means that the issuing bank no longer bears the risk of the loans and the mortgage pool is static. This is in contrast to Covered Bonds where, because the mortgage pool is constantly adjusted to maintain the pool size, the issuing bank bears the credit risk of the mortgages.
On urging higher quality corporate bonds as 2024 maturities approach – Morgan Stanley
“Focus on higher quality investment-grade and high-yield bonds headed into next year… Unlike loan borrowers, which have seen interest costs steadily creeping up, (high-yield) issuers will face a more dramatic ‘sticker shock’ of higher coupons… Downgrades will not be limited to junk issuers… expect between $75 billion and $100 billion in downgrades among A-rated high-grade companies to BBB”
On ECB rates to stay unchanged for next few quarters – ECB Policymaker Francois Villeroy
“Interest rates have reached a plateau where they will likely remain for the next few quarters… There aren’t just peaks and descents: there are also plateaus, where you can experience the effects of altitude and appreciate the view… That’s what we’ll probably be doing for at least the next several meetings and the next few quarters
On China Property Stocks Surging China Selecting 50 Firms for Funding
“Directionally this would be positive as it should enhance confidence from both homebuyers and banks… if property sales of a non-SOE deteriorate substantially, we believe most banks may still be reluctant to extend support”
Andrew Zhu, fund manager at at Hainan Shire Asset Management
“We want to see which private investors are actually on the list, as well as the size of the funding eventually delivered, because in reality, banks that have low risk appetite might not provide that much support”