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Bonds continued to rally across the board on Thursday with Treasury yields 9-11bp lower, extending the move post the CPI report that was softer than expected. The drop in the inflation reading has strengthened the case for only a single rate hike by the Fed for the remainder of 2023, at the upcoming FOMC meeting on 26 July. The peak Fed Funds rate remained flat at 5.38%. US equity indices marched higher with the S&P and Nasdaq adding to the previous day’s gains, rallying by 0.9% and 1.6% respectively. Credit spreads however, widened with US IG and HY CDS spreads wider by 1.5bp and 5bp respectively.
European equity indices closed higher too with European main CDS spreads 0.5bp wider while Crossover CDS were marginally tighter by 0.3bp. Asia ex-Japan CDS spreads also tightened by 0.6bp and Asian equity markets have opened higher today. The Asia ex-Japan CDS spread is currently at 110.7bp, having tightened ~9bp over the course of this week following the broad risk on sentiment in markets helped by slowing inflation.
Azul raised $800mn via a 5NC2.5 bond at a yield of 12.25%, tightening from an initial guidance of high 12%. The senior secured bonds have expected ratings of B3/B- (Moody’s/Fitch). The new notes carry a lower yield relative to its existing senior unsecured bonds, currently yielding 16-20% given their capital structure seniority. According to Fitch, the notes will be secured by certain cash flows and receivables generated by Azul’s business lines, including its airline business, TudoAzul and Azul Viagens. The rating agency also said that the notes are also secured by certain intellectual property of TudoAzul and Azul Viagens.
RBC raised $2.35bn via a three-part deal. It raised:
Yangzhou Urban raised $300mn via a 3Y bond at a yield of 5.5%, 45bp inside initial guidance of 5.95% area. The senior unsecured bonds are unrated, while the issuer is rated BBB (Fitch). The bonds also have a change of control put at 101. Proceeds will be used to refinance the principal of the issuer’s existing offshore medium to long-term notes due in August 2023.
Hanhwa Q Cells hires for $ 5Y green bond
Shinhan Financial hires for $ 5Y social bond
Rising stars are companies that have recently seen credit rating upgrades that pull its rating to investment grade category from its previous junk or high yield category. They are termed as rising stars as their financial and/or operational metrics show an improving trend. The opposite of rising stars are fallen angels, which are issuers that have been recently downgraded to junk category from its previous investment grade rating category.
Goldman Sachs’ chief credit strategist notes that the drop in HY issuances in 2023 “is entirely driven by rising stars exceeding fallen angels”. As per Dealogic, H1 new borrowings by US High Yield companies is the lowest since 1995 at only $33.2bn. The overall $90bn raised by such companies in H1 predominantly reflects refinancing issuances than new borrowings, FT notes.
On the Onset of Disinflation in the US– Yardeni Research preside Edward Yardeni
“We could have a trifecta, really great numbers. Expected inflation on Monday was lower than expected, CPI was great and the PPI is going to be very good as well. So, disinflation is here.”
On Interest Rate Decisions in the Eurozone – ECB
“It was seen as essential to communicate that monetary policy had still more ground to cover to bring inflation back to target in a timely manner…The view was held that the Governing Council could consider increasing interest rates beyond July, if necessary…(Market expectations at the time) could be judged as insufficient to bring inflation back (to 2%).”
On the Foreign Inflows into EM Portfolios in June – IIF economist Jonathan Fortun
“The emerging market credit outlook should continue to improve as growth slows, inflation eases and the geopolitical climate turns more market-friendly…Nevertheless, region-specific factors, upcoming elections and surprises in world markets could derail the momentum that is building.”
On a Shrinkage in the US Junk Bond Market
Andrzej Skiba, head of BlueBay US fixed income at RBC
“Dramatically lower issuance is really underpinning (junk bonds) in terms of valuations.”
Marty Fridson, CIO at Lehmann, Livian, Fridson Advisors
“It’s asymmetric…These conditions can cause the market to be overvalued, but they don’t protect you from a huge sell-off and a gapping down in prices when things turn around.”
Anders Persson, fixed income CIO at Nuveen
“…as we move into year-end, there are concerns that as recessionary headwinds start hitting the markets, we will see volatility pick up and spreads widen.”
Adam Abbas, co-head of fixed income at Harris Associates
“I view the high-yield asset class, especially double-Bs, (as) fairly vulnerable if we do move into a recession that’s not just a very minor and shallow and brief recession.”
Lotfi Karoui, chief credit strategist at Goldman Sachs“(The US junk bond supply shrinkage this year) is entirely driven by rising stars exceeding fallen angels, (although many recent upgrades reflect a) backlog essentially of rising star candidates that should have probably been upgraded in late 2020, mid-2021”.