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US Treasury yields jumped higher by as much as 10bp after a hawkish FOMC to its highest levels in over a decade. The Fed held its target Fed Funds range at 5.25-5.50% as expected, while 12 of 19 members favored another rate hike in 2023 as seen in its dot plots (see chart above). Regarding the fed funds rate, Jerome Powell said, “We want to see convincing evidence really, that we have reached the appropriate level”. With regards to a soft-landing, Powell said that while it was not their baseline, it was their “primary objective” and part of the forecast. The Fed dot plots expect the benchmark rate to be at 5.1% by end-2024, up from 4.6% in their last projections in June. The dots also showed new projections for 2026. CME probabilities continue to show that markets expect the Fed to keep rates on hold in November with a 71% probability, unchanged from prior to the FOMC meeting. For the December meeting, markets expect the Fed Funds rate to remain unchanged with a 53% probability vs. 59% before the FOMC meeting. In credit markets, US IG CDS spreads jumped wider by 7bp while HY spreads widened by 6.7bp. S&P 500 fell 0.9% and Nasdaq fell 1.5%.
European equity markets ended higher yesterday. In credit markets, European main CDS spreads were wider by 5bp while crossover spreads widened 15bp. In UK’s, inflation unexpectedly slowed to its lowest level in 18 months with CPI rising 6.7% YoY in August, less than the 6.8% in July and below estimates of 7%. Core CPI fell even more, to 6.2% from 6.9%. Markets are pricing-in a 50% chance of a 25bp hike by the BOE later today. Asian equity markets have opened lower this morning following US bourses and Asia ex-Japan CDS spreads have widened 5.9bp.
Jinshine International raised $390mn via a 3Y bond at a yield of 6.5%, 30bp inside initial guidance of 6.8% area. The senior unsecured bonds are unrated but are guaranteed by Xuzhou Economic And Technology Development Zone which is a state-owned company. The bonds have a change of control put at 101. Proceeds will be used to refinance its existing debt, which likely includes $400mn of its outstanding 4.5% bonds due November 2023s.
Greenwashing is a term used to describe corporate/government marketing practices that emphasize on its environmentally-friendly initiatives that are, in truth, vastly overstated. While this is not a new term, its relevance has increased over the past few years with the surge in green, social and sustainable bond issues, with several institutional investors and industry bodies questioning the intent and/or effectiveness of these bond issues. The term greenwashing was coined by environmentalist Jay Westerveld in 1986 and originates from his visit to the Beachcomber Resort in Fiji in 1983. He noticed that the resort had placed a note beside the towel stand that encouraged patrons to reuse towels to reduce ecological damage. However, looking at the ongoing construction of new bungalows and vast amounts of wastage at the resort, it was clear to Westerveld that the resort did not care much for the environment and were simply looking to reduce its expenses associated to towel cleaning.
Bond issuers had initially taken to the ESG market as greeniums offered lower financing costs. However, the markets are thinking twice about the merits of doing so at the risk of greenwashing accusations. Despite the cost savings, issuing ESG bonds comes with a high level of scrutiny post-issuance. Therefore, issuers have to consider the reputational risk that they may incur before sending ESG debt to the market if if may not yet be fit for purpose.
The US SEC has adopted a new rule to crack down on “greenwashing” with a new investment requirement. A fund’s investment portfolio should match a fund’s advertised investment focus. Such truth in advertising promotes fund integrity on behalf of fund investors”, said SEC chair Gary Gensler said on Wednesday at a voting meeting on the rule.
On Beginning of the Bursting of the BBB BubbleBofA Analysts
“This upgrade cycle is the reflection of companies shoring up their balance sheets ahead of a potential recession, originally expected for this year… record pace of upgrades has partially reversed the big downgrade cycle following the global financial crisis…. Because of that default rate, you cleared out a lot of the lowest rated companies that were under the most stress. Simultaneously, you had a number of downgrades, so triple B-rated securities into Double-B or Single B-rated into high yield”
On Credit Risk Gauge Rising as Market Digests Hawkish Pause
Jack Parker, associate PM of global fixed income at Brandywine Global
“Coming into today, we thought the market was being far too sanguine about a further hike this year and the number of cuts in 2024… today’s decision implies the Fed will keep policy tighter for longer”
Katie Binns, director of fixed income and multi-asset indexes at Morningstar Indexes
“Today’s hold on benchmark rates underscores a cautious Fed that is still looking to assess the longer-term progress of previous rate hikes… increase in the median fed funds rate forecast for 2024 suggests that the Fed’s battle on inflation will wage on, with fewer rate hikes than investors had expected”
Zachary Griffiths, senior fixed-income strategist at CreditSights
“Definitely seems hawkish at the outset with an improvement in the economic growth assessment”
On Fed May Have to Hike More to Fight Sticky Inflation -JPMorgan CEO Jamie Dimon
“Odds are higher that they will have to go higher than they are today. I’m talking about four months from now, six months from now — that inflation will be at 4% and it won’t be coming down… We have a very strong economy, but don’t confuse today with tomorrow”
Investors Favor Long Blue-Chip Bonds – Marsh & McLennan CFO, Mark McGivney
“By far, there was more demand in that tranche… seems to suggest that people think the 30-year buy isn’t so bad right now… we found the efficiency in the 30-year and we were able to compress the spreads a lot more there”