Markets are now pricing in a 72% probability of a 50bp hike at the FOMC’s March meeting vs. 31% a day ago after Fed Chairman Jerome Powell’s hawkish comments at the Congressional Testimony. He said, “the ultimate level of interest rates is likely to be higher than previously anticipated” and added “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes”. Apart from the 50bp rate hike in March, markets are pricing in three more hikes of 25bp each at the subsequent FOMC meetings in May, June and July based on the CME’s maximum probability calculations. This implies a target fed funds range of 550-575bp vs. the current range of 450-475bp.

US 2Y Treasury yields shot higher by 15bp with the peak Fed Funds rate up 16bp to 5.64% for the September 2023 meeting. The US 2s10s Treasury curve has thus inverted to below -100bp, its lowest since 1981. US IG and HY CDS spreads widened by 2.7bp and 16.3bp respectively. The S&P and Nasdaq dropped after Powell’s comments, down by 1.5% and 1.3% respectively. 

European equity markets ended mixed. European main CDS spreads widened 1.1bp and the crossover CDS spread widened 8bp. Asian equity markets have opened in the red. Asia ex-Japan CDS spreads widened by 2.9bp.

Deep Dive Course on Bonds

New Bond Issues

  • Bank of East Asia $ 4NC3 LAC at T+240bp area

New Bond Issues 8 Mar 23

HSBC raised S$1bn via a 10NC5 Tier 2 bond at a yield of 5.3%, 32.5bp inside initial guidance of 5.625% area. The subordinated notes have expected ratings of Baa1/BBB/A-, and received orders over S$2.4bn, 2.4x issue size. Proceeds will be used for general corporate purposes, and to maintain or further strengthen the issuer’s capital base. If not called by the coupon reset date (14 March 2028), the current fixed coupon of 5.3% will be reset to 5Y SGD OIS Swap+185bp. Private banks took the lion’s share at 57% followed by fund managers who took 22%, banks 10% and insurance and pension funds 11%. Singapore accounted for 93% and Europe and the rest of Asia 7%. The new bonds are priced 22bp wider to Credit Agricole’s similarly rated S$ 4.85% 2033s issued last week that yield 5.08%.

NatWest raised €500mn via a 5NC4 social bond (Term of the Day, explained below) at a yield of 4.699%, 25bp inside initial guidance of MS+145bp area. The senior unsecured bonds have expected ratings of A3/BBB/A, and received orders over €1.4bn, 2.8x issue size. Proceeds will be used to (re)finance lending to women-led businesses in accordance with the issuer’s framework. If not called by the coupon reset date (14 March 2027), the current fixed coupon of 4.699% will be reset to 3M Euribor+128.9bp.

Islamic Development Bank raised $2bn via a 5Y Sukuk at a yield of 4.598%, 5bp inside initial guidance of SOFR MS+60bp area. The senior unsecured bonds have expected ratings of Aaa/AAA/AAA, and received orders over $2.2bn, 1.1x issue size. The bonds are issued by IsDB Trust Services No.2 SARL and guaranteed by Islamic Development Bank. The deal is the first issuance from the gulf in two weeks.


New Bonds Pipeline

  • Shinhan Bank hires for $ senior bond
  • REC hires for $ Long 5Y Green bond
  • Qatar plans for $ bond


Rating Changes

Term of the Day: Social Bond

These are bonds issued by companies to specifically fund projects with social benefits (new/existing), which should be mentioned in the prospectus. ICMA’s social bond principles set out a standard covering four elements as follows:

– Use of proceeds (range of 6 categories but not limited to them)

– Process of evaluation and selection of social projects

– Management of proceeds

– Reporting

Examples of projects for social bonds include affordable housing, socioeconomic empowerment, essential service access and projects of their like.


Talking Heads

On Jerome Powell regarding Rate Hikes at the Congressional Hearing

“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated…The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy”

On seeing ‘reasonable chance’ of Fed raising rates to 6% – Rick Rieder, BlackRock CIO Fixed Income

“We think there’s a reasonable chance that the Fed will have to bring the Fed Funds rate to 6%, and then keep it there for an extended period to slow the economy and get inflation down to near 2%”

On Goldman Lifting Forecast for Peak Fed Rate After Hawkish Powell Testimony

“We expect the data ahead of the March meeting to be mixed but firm on net, and we therefore see our standing forecast of a 25bp hike in March as a close call, with some risk that the FOMC could hike by 50bp instead… expect that the median dot.. will rise by 50bp to a peak of 5.5%-5.75% in 2023”

On Fears Half-Point Hike Would Confuse Market – JPMorgan CIO, Bob Michele

“If the unemployment data this week is very strong then you’ve got 50bp back on the table. But that is a pretty high hurdle to get to once you’ve down-shifted to 25bp… To go back to 50 would be pretty confusing to the market. I hope they don’t do it. I hope they’re willing to run a string of 25bp increases.”


Top Gainers & Losers – 08-March-23*

BondEvalue Gainer Losers 8 Mar 23

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