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While the month of May saw bond investors flock to safer assets amid trade tensions, June was characterized by a return to riskier assets on the back of a dovish stance by major central banks.

The Fed signaled a possibility of a rate cut during the FOMC meeting on 19th June, when they kept rates unchanged. This came just a day after then ECB President, Mario Draghi suggested that additional stimulus can be used if inflation targets are threatened. This, coupled with news of Christine Lagarde being nominated as the new ECB President, pushed European government bond yields lower with all German bonds out to 20-years in negative territory.

85% of bonds in the BEV universe yielded a positive price return (ex-coupon) in June vs. 51% in May. We have plotted the price returns against credit rating in the box and whisker plot below.

The horizontal line inside each of the six boxes indicates the median return, while the box area above and below it represents the upper and lower quartile respectively. The dots that fall above and below the bounds are outliers with each dot representing a bond.

True to their nature, high yield bonds (BB+ and below) delivered a better price return for investors vs. investment grade bonds (BBB- and above), albeit with more risk, as can be estimated by comparing the variance in the data for each rating category.

An interesting trend emerged when looking at price returns of sovereign bonds from the BEV universe. Of the 182 sovereign bonds in our universe, all but two bonds yielded a positive price return. Further, contrary to May when we reported investor preference for higher-rated sovereigns, June saw a marked preference for lower-rated sovereign bonds. We have plotted the price return (ex-coupon) of all sovereign bonds in the BEV universe in the map below.

Lower rated sovereign bonds rallied in Jun-19 3

Leading the charts was Ukraine’s 7.375% bond due 2032 rated B- with a 9.9% price return, followed by Nigeria’s 7.625% bond due 2047 rated B with an 8.9% return and Argentina’s 7.5% bond due 2026 rated B with an 8.3% return.

Fed Futures Implied Probability

Fed funds rate probability4

Markets have baked in a 100% probability of a rate cut in the next FOMC meeting on 31st July, with a 98.2% probability of a 25 basis points cut. The probability of a 50 basis points cut was reduced from 25% last week to 1.8% after strong non-farm payroll numbers (224k vs. an estimate of 160k) were announced.

Asia ex-Japan G3 Issuance

Asia ex-Japan G3 currency issuance volume for June came in at $40.5 billion, the highest monthly volume since November 2017. This was driven by a 14-month high investment grade issuance volume of $25 billion and unrated deals totaling $7.4 billion.

Asia ex-Japan G3 issuance volume for Jun-19 3

Largest Deals in June 2019* (ranked by performance)

 
Issuer / Coupon / Maturity Size
(mm)
Issue Price Price
(9-Jul-19)
Return since
Issuance

Barclays GBP 7.125% Perp

1000

100

105.39

5.39%

Indonesia EUR 1.45% 2026

849.7

99.74

104.45

4.72%

LTA SGD 3.3% 2054

1400

100

104.47

4.47%

Credit Suisse SGD 5.625% Perp

750

100

101.91

1.91%

Sri Lanka 7.55% 2030

1500

99.95

101.5

1.55%

ChemChina 3.875% 2029

900

99.38

100.55

1.18%

Korea 2.5% 2029

1000

98.46

99.23

0.79%

Weibo 3.5% 2024

800

100

100.5

0.50%

ICBC 3.281% 2024

750

100

100.2

0.20%

Morgan Stanley 3.38% 2022

750

100

100.17

0.17%

ICBC 3.171% 2022

750

100

100.05

0.05%

CRCC Chengan 3.97% Perp

1000

100

100.04

0.04%

ChemChina 3.375% 2024

900

99.78

99.67

-0.11%

Guangzhou Rural 5.9% Perp

1430

100

98.99

-1.01%

CMB 3% 2024

900

99.44

98.18

-1.27%

Source: BondEvalue Primarily from the APAC region with benchmark deals from the Middle East and Europe |
All bonds are denominated in USD unless stated otherwise

Top Gainers & Losers – June 2019*

Top Gainers Price
(9-Jul-19)
Change
(%)
Top Losers Price
(9-Jul-19)
Change
(%)

Cypress 4.5% 2022

168.1

18.4%

Qinghai 7.25% 2020

80.6

-7.5%

IS Bank 7% 2028

83

11.4%

Deutsche EUR 1.75% Perp

71

-4.6%

Ukraine 7.375% 2032

96.9

9.9%

Union Life 3% 2021

86.2

-4.5%

GCL 7.1% 2021

98.1

9.5%

Envision 7.5% 2021

82.5

-4.5%

TSKB 7.625% 2027

82.8

9.4%

Pemex EUR 2.089% 2023

94.6

-3.9%

Akbank 7.2% 2027

88.4

9.3%

China Grand Auto 5.625% Perp

91.5

-3.8%

Akbank 5.125% 2025

91.5

8.9%

Pemex 6.5% 2029

97.2

-3.6%

YapiKredi 5.85% 2024

92.4

8.8%

Pemex 6.5% 2041

89.5

-3.5%

UniCredit EUR 5.375% Perp

92.8

8.6%

Pemex 6.375% 2045

87

-3.4%

IS Bank 7.85% 2023

96

8.5%

Pemex 5.625% 2046

81.4

-3.3%

INALUM 6.757% 2048

124.3

8.3%

Pemex 6.75% 2047

90

-3.2%

Argentina 7.5% 2026

85.9

8.3%

Pemex 6.5% 2027

99.3

-2.9%

Turkey 5.75% 2047

82.5

8.1%

Pemex 6.625% 2035

93.4

-2.8%

Kenya 8.25% 2048

104.8

8.1%

NORD LB 6.25% 2024

91

-2.6%

Turk Eximbank 6.125% 2024

95.6

7.7%

Pemex 3.5% 2023

95.4

-2.6%

Source: BondEvalue | *We have omitted bonds trading below $70 on 31-May-19 as illiquidity distorts price changes.
All bonds are denominated in USD unless stated otherwise

Turkish bonds rose in June on account of slower inflation growth of 18.7% in May vs. 19.5% in April, and after the central bank cut overnight lending rates for primary dealer banks from 24% to 23%. However, the good news was short-lived as president Erdogan fired central bank governor Murat Cetinkaya and replaced him with his deputy. Turkish bonds fell on the news, as investors doubt the central bank’s independence.

European yield hungry investors piled up Italian bonds after the ECB signaled a possibility of additional stimulus. Italy received orders worth EUR 17 billion for an offering of EUR 3 billion worth of an existing 50-year bond. Yields on UniCredit’s EUR 5.375% Perp dropped 100 basis points from 7% on 30th May to 6% on 9th July.

Pemex joined the list of fallen angels after it was downgraded to junk by Fitch ratings in early June. The state-owned petroleum company was downgraded by one notch to BB+ from BBB- on account of it underinvesting in its upstream business, which could lead to further production and reserve declines.

 

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