Advanced Theory & Practice of Bonds

IBF Recognized Under FTS
1-2 December 2021

Two-day immersive course on bonds designed for private bankers and advisors. 90% funding* available to eligible company-sponsored candidates.

While both S&P and Nasdaq ended almost unchanged, the energy sector rallied over 4.3% gaining the most. Alphabet soared ~8% on strong earnings while Amazon fell after Jeff Bezos said he will step down as CEO. US ADP non-farm payrolls printed at a better than expected 174k, while the ISM Services reading also came out positive at 58.7, among the highest readings in two years. US 10Y Treasuries firmed 3bp on the back of macro data and better sentiment. Former ECB President Mario Draghi has accepted a request to form a new Italian government. US IG CDS spreads were 0.2bp tighter and HY was 4.6bp tighter. EU main CDS spreads tightened 1.4bp and crossover spreads tightened 8.3bp. Asia ex-Japan CDS spreads are 1.5bp tighter while Asian equities are mixed today.

Bond Traders’ Masterclass

If your first language is Spanish and you are keen on learning the fundamentals of bonds, do join our masterclass on A Practical Introduction to Bonds, which will be conducted in Spanish on February 17 at 9am Mexico City / 3pm London / 7pm Dubai. The session will be conducted by bond market veterans that have previously worked at premier global institutions such as HSBC and Citibanamex. Click on the image below to register.

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New Bond Issues

  • Alibaba Group $ 10Y/20Y/30Y/40Y at T+130bp/140bp/150bp/160bp areas
  • Fantasia Holdings tap of 11.875% 2023s at 10.4% area alongside exchange offer
  • Jinchuan Group $ 3Y at 4.5% area
  • GLP China Holdings $ 3Y Shanghai Pilot Free Trade Zone bond at 2.6%

New Bond Issues 4 Feb

Kexim raised $1.5bn via a three-trancher. It raised:

  • $500mn via a 3Y bond at a yield of 0.419%, 27bp inside initial guidance of T+50bp area
  • $700mn via a 5Y bond a yield of 0.737%, 32bp inside initial guidance of T+60bp area
  • $300mn via a 10Y bond at a yield of 1.509%, 32bp inside initial guidance of T+70bp area

The bonds have expected ratings of Aa2/AA/AA-, and received orders over $5.8bn, 3.9x issue size. Central banks and sovereign wealth funds bought more than half of the bonds. Orders for the 3Y came in were over $1.5bn  – Asia took 34%, EMEA 42% and the US 24%. Central banks and sovereign wealth funds bought 64%, asset managers and fund managers 20%, corporate treasuries 12% and banks, insurers and pension funds 4%. The 5Y bond received final orders of over US$2.3bn –  Asia took 27%, EMEA 62% and the US 11%. Central banks and sovereign wealth funds bought 43%, banks 39% and asset managers and fund managers 18%. Final orders of the 10-year note exceeded US$2bn – Asia took 40%, EMEA 52% and the US 8%. Central banks and sovereign wealth funds bought 49%, banks 32% and asset managers and fund managers 19%. “The pricing of the 10-year tranche has tightened the most after central bank investors – who are normally more keen on short-term tenors – showed strong demand this time,” said a banker.

AVIC Capital raised $300mn via a 5Y bond at a yield of 2.409%, or T+195bp, 40bp inside initial guidance of T+235bp area. The bonds have expected ratings of A3, and received orders over $870mn, 2.9x issue size. Proceeds will be used for debt repayment. Asian took 99% of the bonds and Europe 1%. Banks and financial institutions received 90%, asset/fund managers 7%, and insurers/private banks/ others 3%. The bonds will be issued by wholly owned subsidiary Blue Bright and will be guaranteed by the Shanghai-listed parent company. The bonds were priced inside the curve as compared to its older 2.5% bonds due June 2025, which currently yield 2.37%.

Southwest Securities International raised $178mn via a 3Y bond at a yield of 4%, 60bp inside initial guidance of 4.6% area. The bonds were unrated and proceeds will be used to refinance offshore debt due within one year.

Xinyuan Real Estate raised $100mn via a tap of their 14% 2024s at par with a 13.99% yield to put (YTP), unchanged from price guidance. The bonds are rated B- with the put option at par, puttable on January 25, 2023. Proceeds will be used for offshore debt refinancing, which may include purchases or redemption of outstanding notes, and for general corporate purposes.

New Bond Pipeline

  • India Green Power/Renew Power $ green bond
  • Ultratech Cement $ 10Y sustainability-linked bond
  • Liberty Mutual Group
  • Buma $ 5NC2 bond

 

Rating Changes

 

Term of the Day

TIPS

TIPS or Treasury Inflation-Protected Securities are fixed income securities issued by the US Treasury whose returns are linked to the inflation rate. TIPS provide investors protection against inflation by adjusting the principal higher with inflation and lower with deflation, as measured by the Consumer Price Index (CPI). At maturity, investors are paid the higher of the adjusted principal or the original principal. Interest on TIPS is fixed, paid out twice in a year and is applied to the adjusted principal.

As investors expect inflation in the US to inch higher in the short- to medium-term, demand for TIPS is likely to increase. Bloomberg reported that ~$3.5bn of funds flowed into ETFs which buy TIPS, the strongest monthly inflow on record.

 

Talking Heads 

On monetary policy to remain steady even as prices are expected to spike – Charles Evans, Chicago Federal Reserve Bank President

“It will be critical for monetary policymakers to look through temporary price increases and not even think about thinking about adjusting policy until the economic criteria we have laid out have been realized,” Evans said. “So I see us staying the course for a while.” “Monetary policy still has a good deal of work to do here,” he said.

On the proposed $1.9 trillion fiscal package speeding recovering and lifting inflation – Charles Evans, Chicago Federal Reserve Bank President

“I’m hard-pressed to see the size of this leading to overheating,” Evans said. “Do we maybe get to our inflation objective sooner? I think we do.”

On Yellen’s calls to act now and act big for pandemic relief – in a statement by the US Treasury

US Treasury Secretary Janet Yellen said it was imperative to enact a comprehensive $1.9 trillion economic rescue package that includes $350 billion in aid to state and local governments. “The benefits of acting now – and acting big – will far outweigh the costs over the long term,” it said.

On the increasing difficulty in picking winners in the riskiest bond markets 

Paul Greer, money manager at Fidelity International

“There is some value in selective BB rated names in emerging markets, but most of the spread compression and total return gains have already come and gone,” said Greer. “We have much less conviction on B or CCC-rated emerging-market credits with elevated cashprices,” he said.

Bryan Carter, global head of emerging-market debt at HSBC Global Asset Management

“Although high-yield credit spreads are back to historical average levels, having recovered from the Covid-19 crisis panic period, we see room for spreads to enter a euphoric zone based on a Goldilocks combination of economic growth rebound, easy monetary policy and another fiscal stimulus from Congress,” Carter said. “This could last several months or quarters.”

Michael Cirami, money manager at Eaton Vance Corp

“That’s been giving investors comfort that the market is open and there’s time for countries to appropriately adjust policy,” said Cirami. But “there’s always a concern about a liquidity event turning into a solvency event,” he said. “There’s still room to go in the high-yield space but it’s really dependent by country,” said Cirami.

On the Treasury yield curve at its steepest level since 2017, suggesting economic boom and possibly inflation

Jim Caron, head of global macro strategies on the global fixed income team at Morgan Stanley Investment Management

“It’s being driven by the fact that policy, fiscal and monetary, is allowing there to be stronger economic growth for longer, without the Fed getting in the way, and that basically is allowing the economic cycle to extend further into the future,” said Caron. “It’s really about having an economic boom, allowing policy to support that boom,” said Caron. “That’s the key driver of why the curve is steepening.”

Mark Cabana, head of U.S. short rates strategy at Bank of America
“The acute focus on downside risks may be fading slowly, and who knows exactly what it will do in six months, but I think the market is realizing some of the worst-case scenarios aren’t likely to be as severe,” he said. “It’s due to the belief there will be fiscal stimulus,” he said. “That it’s going to be highly supportive of economic growth.” “It’s going to improve longer-run growth and inflation expectations, and the market over time will be less focused on downside risks and will focus on upside risks,” Cabana added.

James Paulsen, chief investment strategist of The Leuthold Group

“I personally think we might have GDP growth of 6% to 8% this year,” Paulsen added. “Inflation is part of it.”

Peter Boockvar, chief investment officer at Bleakley Advisory Group

“It’s a lot compared to where interest rates are,” said Boockvar. “The question is, does the market start to care. Obviously, it hasn’t cared yet. I think it’s the biggest risk.”

Michael Schumacher, head of rate strategy at Wells Fargo

“The economy finally was recovering from the financial crisis,” said Schumacher. “People were thinking about bullish economic policies. There were more signs of growth and people were talking about the Fed tightening.”

On China’s trend of corporate defaults set to continue as policymakers tighten credit and pull back stimulus

Chuanyi Zhou, a credit analyst at Lucror Analytics

“The track record of provincial government’s support to local state-owned enterprises and other companies would be important to look at when evaluating the province’s credit risk”, said Zhou.

Ting Meng, credit analyst at ANZ Bank China Co

“Economic development and leverage management are the fundamentals of regional creditmetrics,” said Meng, adding that those factors “decide the repayment capability.”

On Mexico to consider rate cuts after April – Jonathan Heath, Deputy Governor

“I think our discussion will center on whether a window of opportunity reopens to continue with this accommodative cycle, or if we still have to continuewith this pause, because inflation is starting to climb again a bit,” Heath said. Heath said the bank is expecting inflation to accelerate in April, which he called “the most dangerous” month, and then slow closer to 3% toward the end of the year. It’s possible the slowdown may not be clear, however, “and that window of opportunity might not exist,” he said.

 

Top Gainers & Losers – 4-Feb-21*

BondEvalue Gainer Losers 4 Feb

 

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