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US Treasury yields shot higher across the curve led by the 2Y and 5Y yields, up over 16bp and the 10Y yield up 13bp as curve flattened. US economic data continued to highlight further strength in the economy. US Q1 GDP saw a significant revision higher in its final reading to 2% vs. its prior reading of 1.3%. Jobless claims for the prior week posted its biggest drop in 20 months by 26k to 239k vs. forecasts of 265k. Fed Chairman Jerome Powell also said that the Fed expects “the moderate pace of interest rate decisions to continue”. Sticking to his hawkish stance, he added that a “strong majority” of Fed members expect to raise rates at least two more times by end-2023. The peak Fed Funds rate jumped 6bp to 5.42%. The S&P ended 0.5% higher while the Nasdaq was flat. Credit spreads tightened with the US IG and HY CDS spreads tighter by 0.9bp and 5bp respectively.
European equity indices closed slightly higher, with European main and Crossover CDS tighter by 1.1bp and 7.3bp. Asia ex-Japan CDS spreads were flat and Asian equity markets have opened mixed this morning week.
Standard Chartered raised $2.5bn via a three-tranche deal. It raised:
The senior unsecured bonds have expected ratings of A3/BBB+/A. Proceeds will be used for general corporate purposes.
Ecopetrol raised $1.5bn via a two-tranche deal. It raised $1.2bn via a long 5Y bond at a yield of 8.625%, 17.5bp inside initial guidance of 8.8% area. It also raised $300mn via a tap of its existing 8.875% 2033 bond at a yield of 9%, 25bp inside initial guidance of 9.25% area. The new senior unsecured bonds have expected ratings of Baa3/BB+/BB+, in line with the issuer’s existing 2033s. Proceeds from the notes will be used to finance the issuer’s 2021-2023 investment plan and/or expenditures outside of their 2021-2023 investment plan. The notes have a CoC put at 101, and make-whole calls at T+50bp.
Commerzbank raised €500mn via a 10.25NC5.25 Tier 2 bond at a yield of 6.856%, 5bp inside the upper bound of initial guidance of MS+375bp area. The subordinated notes have expected ratings of Baa3/BB+, and received orders over €650mn, 1.3x issue size. Proceeds will be used as Basel III Tier 2 Capital. The new bonds are priced at a new issue premium of 11.6bp to its existing 6.5% 2032 Tier 2 callable in 2027s that yield 6.74%
A change of control put is a common covenant in bond offerings, mentioned in the bond’s prospectus. Bonds that carry a change of control put offer bondholders the option to sell the bonds back to the issuer at a pre-defined price upon the occurrence of a change of control event, which is typically a change in ownership of the issuer. The option to redeem the bonds in this case lies with the bondholder, as against a call option, which lies with the issuer, not the bondholder.
On US Inflation and Fed Rate Hikes
Jerome Powell, Fed Chairman
“We expect the moderate pace of interest rate decisions to continue…Inflation pressures continue to run high, and the process of getting inflation back down to 2 percent has a long way to go.”
Richard Moody, chief economist at Regions Financial Corp
Moody said that the upward GDP revision has trivial implications for Fed policy, arguing that it mostly reflected healthcare outlays and underneath the hood even pointed to a deterioration in business investment.
Raphael Bostic, Atlanta Fed President
“I don’t see as much urgency to move as stated by others, including my chair…(the current policy rate is high enough to bring inflation down to 2%) over an acceptable timeframe…(However) I do recognise that if inflation moves away from target or seems to significantly stall out, then we’ll probably have to do more or if inflation expectations start to move in a difficult way, we might have to do more.”
On More Expected Policy Tightening
Jerome Powell, Fed Chairman
“Policy hasn’t been restrictive enough for long enough…I wouldn’t take moving in consecutive meetings off the table at all.”
Christine Lagarde, ECB President
“We still have more ground to cover…We are not seeing enough tangible evidence of the fact that underlying inflation, particularly domestic prices, are stabilising and moving down.”
Andrew Bailey, Bank of England Governor
“(Investors) got a number of further increases priced in for us…My response to that would be: ‘Well, we’ll see.'”
Jennifer McKeown, chief global economist at Capital Economics
“…there were some interesting differences in tone…Most notably, the ECB and BoE sounded more concerned about wage-price spirals than the Fed, supporting our view that rates in Europe will stay higher for longer than those in the US.”
On Argentina’s Optimism for Their Next Government – head of Synopsis Consultores Lucas Romero
“(Presidential candidate Sergio Massa) will have the same difficulties…(Market optimism is overstated) from the perspective that Massa will have his hands freed up. I think the market is underestimating the challenges of governing that this administration will have if it wins an election like this…Today, the market’s priority is to understand whether there’s going to be enough political strength in Argentina to make the decisions that have to be made.”
On China’s Fourth Yuan Fixing in a Week
Selena Ling, head of treasury research and strategy at OCBC
“(Currency stabilization) goes hand in hand with the macro fundamentals of the Chinese economy, so it will be very hard to reverse the trend but what they can do is try to slow down the pace of weakness.”
Redmond Wong, strategist at Saxo Capital Markets HK
“The People’s Bank of China wants to make sure the movements in the yuan is more gradual but we don’t think they want to intervene forcefully to reverse the trend…The PMIs are in line, which may be a relief for investors as people were worried about the worse.”
On Calls for More Chinese Stimulus Amidst Contracting PMI Data
Raymond Yeung, chief economist for Greater China at ANZ
“The PMI figures failed to rebound and reinforce the message that the economy is slowing down…The question is no longer whether the government will deliver growth stimulus. They have been doing so. The right question to ask is the quality of stimulus.”
Bruce Pang, chief economist and head of research at Jones Lang Laselle Inc
“All these require a more forceful package to support the economy to be introduced at a sooner date.”