US 2Y and 5Y Treasury yields moved 8-9bp higher after the St. Louis Fed President James Bullard said that the policy rate needs to rise to at least 5.00-5.25% from the current level to be “sufficiently restrictive”. He added that even a “dovish” Fed would require further rate increases. The peak Fed Funds rate subsequently rose by 7bp to 4.99% for the May 2023 meeting. Probabilities of a 50bp hike at the FOMC’s December meeting continue to stay above 80%. US IG CDS spreads widened 0.3bp and HY spreads saw a 1.5bp widening. US equity markets moved lower with the S&P and Nasdaq down 0.3% and 0.4% respectively.
European equity markets were also lower yesterday. EU Main CDS spreads widened 2.5bp and Crossover spreads widened 9.3bp. Asian equity markets have opened mixed today. Asia ex-Japan CDS spreads widened by 11.6bp, its biggest upmove in over a month.
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New Bond Issues
- Hangzhou Qiantang New Area City Development $ 364-day final at 6.5%
Banque Saudi Fransi raised $700mn via a 5Y bond at a yield of 5.576%, 25bp inside initial guidance of T+195bp area. The bonds have expected ratings of A2/BBB+. Proceeds will be used for general corporate purposes.
DoubleDragon Corporation raised $30mm via a tap of its 7.25% 2025s at a yield of 7.25%, in-line with initial guidance. The senior unsecured bonds are unrated. Proceeds will be used for the development of Hotel 101-Niseko and general corporate purposes.
Mashreqbank raised $500mn via a 10.25NC5.25 bond at a yield of 7.95%, 30bp inside the initial guidance of 8.25% area. The senior unsecured bonds have expected ratings of BBB+. Proceeds will be used for general corporate purposes and to strengthen the issuer’s capital base.
New Bonds Pipeline
- Rakuten Group hires for $500mn 2Y bond
- Korea Investment & Securities hires for $ Green bond
- Zhongrong International Trust hires for $ 367 mn Short 1Y bond
- Shangrao Investment hires for $ Sustainable bond
Rating Changes
- Macy’s Inc. Upgraded To ‘BB+’ On Continued Strong Execution; Outlook Stable
- Fitch Downgrades Jababeka to ‘C’ on Announcement of Exchange Offer
- SoftBank Group Outlook Revised To Negative From Stable On Continuing Investment Weakness; ‘BB+’ Ratings Affirmed
Term of the Day
Pull-to-Par
Pull-to-par refers to a characteristic of a bond’s price, where it approaches the par value (generally 100 or 1,000) as the maturity nears since bonds generally redeem at par. Bonds that trade below par, or at a discount would see their prices move higher towards par while bonds that trade at a premium would see prices move lower to approach par.
A senior portfolio manager at AXA Investment Managers notes that the pull-to-par effect on short-dated UK bonds should significantly benefit their performance as 40% of their portfolio will mature over the next two years.
Talking Heads
On Bets on Left-for-Dead 60/40 Strategy – JPMorgan Asset Management
“This breathes a bit of life into the 60/40 portfolio which so many thought was extinct. While it’s the worst year for 60/40 since 2008, it’s important to use this opportunity to rebuild portfolios. This is rightly a year to be in the bunker. But if you stay in the bunker too long, you miss when the dust settles… With higher yields, bonds are once again a plausible source of income and a potential safe haven…. combination of higher yields and lower equity multiples means that markets today offer the best potential long-term returns in more than a decade”
On ‘Great Bargains’ Coming as Recession Looms – Oaktree’s Howard Marks
“Now our time is coming back… A year ago the outlook was considered flawless and I think we’re going to reach a point where they consider it hopeless… And that’s when you get the big buys. That’s when you get to be a buyer of assets cheap and a maker of loans at high yields with safety… We’ll be looking among the ruins for great bargains.”
On even “dovish” policy assumptions requiring further rate increases – Fed’s James Bullard
“While the policy rate has increased substantially this year, it has not yet reached a level that could be justified as sufficiently restrictive, according to this analysis, even with the generous assumptions. To attain a sufficiently restrictive level, the policy rate will need to be increased further”
Top Gainers & Losers – 18-November-22*
