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Treasury yields jumped higher as the curve continued to bear steepen – 2Y yields were flat while 10Y and 30Y yields were up 7-9bp. The 10Y yield touched 4.09%, the highest level since November 2022. The US Treasury announced it will sell $103bn of securities across 3Y, 10Y and 30Y maturities in Q3, higher than the $96bn sale last quarter, leading to a larger supply of Treasuries, which pushed yields higher. The ADP report released yesterday showed that US private payrolls increased 324k in July, much higher than forecasts of 189k, though lower than June’s 455k print, pointing towards a strong resilient labor market.
European equity markets were lower too. In credit markets, European main CDS spreads were 2.1bp wider and Crossover CDS widened 11.5bp. Asia ex-Japan CDS spreads widened by 3bp. Asian equity markets have opened lower this morning following global bourses.
Wells Fargo raised $5bn via a four-part deal. It raised:
The senior unsecured bonds have expected ratings of Aa2/A+/AA. Proceeds will be used for general corporate purposes.
Columbia Pipeline raised $5.6bn via a seven-part deal. Details are given in the table below:
The HoldCo tranches are rated Baa2/BBB+ (Moody’s/Fitch) while the OpCo tranches are rated Baa1/BBB (Moody’s/Fitch). The bonds have make-whole calls. Proceeds will be used for the repayment of intercompany loans.
Huatai Securities raised $800mn via a 3Y bond at a yield of 5.318%, 30bp inside initial guidance of T+105bp area. The senior unsecured bonds have expected ratings of Baa1 (Moody’s), and received orders over $1.9bn, 2.4x issue size. Proceeds will be retained offshore for purposes of repaying offshore debt when due and supporting offshore business development.
TBAC refers to the Treasury Borrowing Advisory Committee in the US. This committee gathers every quarter to decide on the refunding estimates by the US Treasury for the following quarters. Before the quarterly refunding announcements, the TBAC also sends surveys and has discussions with primary dealers to see the ability of the market to absorb the expected supply of Treasuries.
“The underlying fiscal position and underlying debt trajectory has picked up pace…AAA is the top rating any rating agency can assign, but of course, the US and any other sovereign that’s being rated has no god-given or automatic right to that…It’s fair to say that the rating agencies, based on their own criteria, have been pretty timid in their actions…If anything, Fitch’s action is simply confirming what S&P decided back in 2011, and here we are in 2023.”
“Investors could begin replacing sovereign bonds in their portfolios with the highly rated companies, as some did a few years ago during the European sovereign crisis…Moreover, the few companies that are rated on-par with the US could see their spreads tighten in line with US Treasury bonds.”
On the Urgency for the US to Address its Fiscal Challenges
Hank Paulson, former US Treasury Secretary
“Our fiscal trajectory is concerning…We’re a rich country, and we’ve got time to deal with it. But we need to do some things in the next few years to change that trajectory…The longer we wait, the more painful the solution will be…It’s going to take doing things on both the spending side and the revenue side. We’re going to need more revenues. And we’re going to need to figure out how to deal with some difficult issues in areas like the entitlements.”
Timothy Geithner, former US Treasury Secretary
“You want to move the system to act before it’s late and hard…I hope (that Washington will address its borrowing needs without a crisis happening).”
On the Impact of the US Credit Downgrade
Josh Frost, Treasury Assistant Secretary for Financial Markets
“We see limited or no impact on yields or prices…What we are seeing, in the immediate response, is a very limited price response in markets…We continue to see robust demand for Treasury securities and the decision last night doesn’t change what American investors and people all over the world already know — which is that Treasury securities remain the world’s preeminent safe and liquid asset and that the American economy is fundamentally strong.”
Jan Hatzius, chief economist at Goldman Sachs
“We do not believe there are any meaningful holders of Treasury securities who will be forced to sell due to a downgrade…Because Treasury securities are such an important asset class, most investment mandates and regulatory regimes refer to them specifically, rather than AAA-rated government debt.”
On Brazil’s Future Interest Rate Decisions
Policymakers at Brazil Central Bank’s Monetary Policy Committee
“If the scenario evolves as expected, the Committee members unanimously anticipate further reductions of the same magnitude in the next meetings.”
William Jackson, chief EM economist at Capital Economic
“The relatively dovish tone … suggests that policymakers’ inflation concerns are dissipating more quickly than we’d anticipated…As a result, we now expect interest rate cuts to be more front-loaded.”