S&P and Nasdaq both rose for the second day in a row and closed higher by 1.5% and 2.3% respectively on Friday. Even though growth and technology stocks stabilized after declining in the beginning of last week, S&P and Nasdaq were down 1.1% and 2.2% down on a weekly basis. US 10Y Treasury yields declined for a second day to close at 1.64% after disappointing retail sales in the US. The week will see the release of FOMC minutes on Wednesday. US IG CDS spreads tightened by 1.6bp and HY spreads tightened by 7.1bp. EU main and crossover spreads tightened 1.3bp and 7.2bp. Asian equity indices had a mixed start while Asia ex-Japan CDS spreads were 0.7bp tighter.
New Bond Issues
- HSBC $ 4NC3/11NC10 @ T+95/140bp area
- Redsun Properties $ 210 mn 3NC2 green @ 8% area
- National Australia Bank $ 10yr tier 2 @ T+160bp area
- Shandong Hi-Speed Group $ 3yr @ 4.15% area
Brazilian meat company JBS raised $500mn via a 10Y bond at a yield of 3.75%. JBS is rated BB+ by S&P, and the notes are expected to have the same rating. Barclays, BMO, RBC and Truist were the joint bookrunners on the deal. Proceeds will be used to cover the planned acquisition of Vivera, a plant-based food manufacturer for $414mn. If the acquisition does not go through, proceeds will be used for general corporate purposes.
New Bond Pipeline
- Nanning Communications Investment Group hires for $ bond
- Maldives HDC $ sukuk
Rating Changes
- Moody’s upgrades Eldorado Brasil Celulose to B1, outlook changed to stable
- Moody’s upgrades Antero Resources’ CFR to Ba3, notes to B1
- Moody’s upgrades Antero Midstream’s CFR to Ba3, notes to B1
- Fitch Revises Azerbaijan’s Outlook to Stable; Affirms at ‘BB+’
- Fitch Revises Volkswagen’s Outlook to Positive; Affirms at ‘BBB+’
- Moody’s changes Tata Motors’ outlook to stable from negative; affirms B1 ratings
- MEDNAX Inc. Outlook Revised To Positive By S&P On Declining Leverage; ‘B+’ Ratings Affirmed
- Moody’s affirms Prudential Plc’s debt ratings; changes outlook to stable from negative
- Moody’s affirms Encore’s Ba2 CFR and Ba3 senior secured debt rating, changes outlook to Positive
- Fitch Affirms Credivalores-Crediservicios S.A.’s IDR at ‘B+’; Removes Negative Watch
- Fitch Places Chong Hing Bank’s Ratings on Watch Evolving
- Fitch Assigns TUI Cruises Final ‘B-‘ IDR; Outlook Positive
- Correction: Fitch Affirms Baidu at ‘A’; Outlook Stable
The Week That Was
US primary market issuances rose to $50.8bn, up 69% vs. $30bn in the week prior. The rise in issuance can be attributed primarily to IG issuances that stood at $37.2bn vs. $18.4bn in the prior week. HY issuances were at $12.7bn vs. $10.2bn in the prior week. The largest deals in the IG space were led by Amazon’s jumbo $18.5bn bond deal followed by Caterpillar’s $2.6bn four-trancher. In the HY space, T-Mobile’s $3bn triple-trancher and Goodyear’s $1.45bn dual-trancher were among the notable new bond issues. In North America, there were a total of 55 upgrades and 19 downgrades combined across the three major rating agencies last week. LatAm saw $2bn in new bond deals last week vs. $3.8bn in the week prior led by AI Candelaria and Bimbo Bakeries’ $600mn issuances. EU Corporate G3 issuance saw a marginal increase in issuance last week to $25.1bn vs. $24.9bn in the week prior led by Volkswagen Leasing’s €3bn three-trancher, KfW’s €3bn issuance and Credit Suisse’s $3.25bn 11NC10 deal. Across the European region, there were 31 upgrades and 15 downgrades across the three major rating agencies. GCC and Sukuk G3 issuances were muted last week vs. $1.9bn in the week prior. Across the Middle East/Africa region, there were 0 upgrades and 3 downgrades across the three major rating agencies. APAC ex-Japan G3 issuances were higher at $9.9bn vs. $6.1bn in the prior week flooded by 12 issuances on Tuesday alone – Aussie lender ASB led the table with a €750mn issuance followed by GLP’s $850mn, JSW Hydro’s debut $707mn and Cathay’s return to the dollar bond market with a $650mn issuance. Chinese property developers COGARD, Fosun, Yanlord, Agile and CIFI also sold new dollar bonds with issuance size ranging from $300-$500mn. Of particular mention was COGARD’s deal, which saw them proceed with a $500mn tap of its 3.125% 2025s while pulling its 10Y issuance. In the Asia ex-Japan region, there were 7 upgrades and 3 downgrades combined across the three major rating agencies last week.
Term of the Day
Risk Parity
Risk Parity refers to an asset allocation strategy wherein the allocation or weight assigned to each asset class is defined based on the risk each of them contribute to the overall portfolio, rather than the return. Let’s take an example of the traditional 60:40 portfolio. Here, the 60% allocation to equities contributes to 90% of risk of the overall portfolio given that equities have historically been 3x more volatile vs. fixed income securities. This portfolio is thus very concentrated towards equities – the return on equities during the period would dictate the return on the total portfolio. The risk parity approach avoids this concentration of risk with the construction of more diverse, risk balanced portfolios. The risk parity strategy builds off of the Modern Portfolio Theory (MPT), which promotes the construction of portfolios that maximize expected returns for a given level of risk. However, as opposed to the MPT, risk parity allows for the use of leverage and short selling.
Talking Heads
Inigo Fraser Jenkins and team, Sanford C. Bernstein strategists
“The deeply negative correlation of stocks and bonds that has persisted for most of the last two decades is not a permanent feature of markets but in fact is contingent on a certain macro regime of low and not volatile inflation,” the strategists wrote. “That regime may be coming to an end.”
Charlie McElligott, Nomura Holdings strategist
“Any semblance of an inflation impulse will always act to stoke volatility — as market participants had become utterly cynical as to the prospects for a sustained ‘hot’ economy and its implications for interest rates,” McElligott wrote. “You’re now combustible for brief but violent deleveraging and momentum shocks.”
Charles Chang, greater China country lead at S&P Global Ratings
“If that regulatory push is working, you should see an increase in timely action that flags underlying distress . . . that doesn’t mean there is an increase in distress, it just means that there is an increase in the indication of that distress,” Chang said. “China’s default rates would need to double or triple to reach the level that you see in the US, in Europe and emerging markets,” he said.
“If that regulatory push is working, you should see an increase in timely action that flags underlying distress . . . that doesn’t mean there is an increase in distress, it just means that there is an increase in the indication of that distress,” Chang said. “China’s default rates would need to double or triple to reach the level that you see in the US, in Europe and emerging markets,” he said.
Xiaoxi Zhang, an analyst with Gavekal Dragonomics
“The government wants to take advantage of the strong growth momentum of the post-Covid rebound to deal with structural problems,” she wrote. “But it’s also because the current tightening of credit and withdrawal of supportive economic policies could cause broader financial stress if hidden debt is not handled well.”
Thede Ruest, head of emerging debt markets at Nordea Bank’s investment management unit
“We felt it was a compelling idea.” He expects the strategy to deliver “slightly better yield without too much risk-taking,” and it will “make a difference where it arguably will matter more.” “What we always look for is to have credibility in the issuer, we want to see credible plans in the whole transition of the issuer,” Ruest said.
Burton Flynn and Ivan Nechunaev, fund managers at Terra Nova Capital
“Of course we like best-in-class ESG companies,” they said. “But we really love to invest in companies with opportunities for improvement.” “Investing only in companies that have high ESG standards doesn’t fix problems,” they said. Companies with “stellar ESG reputations” tend to be expensive, which could add to the risk of an “ESG bubble.”
Karine Hirn, founding partner and chief sustainability officer at East Capital
“You want to invest in companies that are improving in terms of ESG.”
Tai Hui, chief Asia market strategist at JPMorgan Asset Management
“There is still meaningful scope to generate returns within EM as long as investors are able to differentiate,” said Tai.
Shamaila Khan, the head of emerging-market debt at AllianceBernstein
“Local markets are becoming more attractive,” said Khan, singling out South African, Russian and Mexican local bonds as among the most appealing. “Selectively, we are finding value.”
On inflation risk sinking 80% of Europe’s company debt sold this year
Vincent Benguigui, a portfolio manager at Federated Hermes
“Duration is already a problem when you see that rate-sensitive sectors underperform and this is going to increase,” said Benguigui. “Clearly everything is stretched.”
Cem Keltek, a credit strategist at Commerzbank AG
“While the extended recovery in fundamentals should provide another layer of support, higher yields in the euro government bonds space should limit euro investment grade’s ability to attract inflows and limit tightening potential once rates stabilize,” wrote Keltek. “Pressure on rates and tapering prospects later in the year render long-end risk-reward unattractive.”
Martin Hasse, a portfolio manager at MM Warburg & Co.
“It’s more or less carry at this point,” said Hasse. “Maybe a little tightening but not so much. High yield and subordinated notes can see more of that.”
Top Gainers & Losers – 17-May-21*
