US Treasury yields moved lower with the curve bull flattening led by the 30Y and 10Y, down 8bp and 6bp respectively. The peak Fed Funds rate was slightly higher by 1bp to 5.09% for the June 2023 meeting. Probabilities of a 50bp hike at the FOMC’s December meeting currently stands at 76%. PIMCO joined BlackRock, UBS, JPMorgan and others stating that “value has returned to the fixed income markets”, underscoring the attractiveness of buying bonds. US IG CDS spreads tightened 1.7bp and HY spreads saw a 10.9bp tightening. US equity markets ended higher with the S&P and Nasdaq up 1.4% each.
European equity markets were also higher. EU Main CDS spreads tightened 2.5bp and Crossover spreads tightened 15.3bp. Asian equity markets have opened broadly higher today. Asia ex-Japan CDS spreads tightened by 3.7bp. Singapore reported Q3 GDP growth of 4.1%, lower than the 4.4% print seen in the government’s advance estimate. The Ministry of Trade and Industry (MTI) said that it expects GDP growth to slow to 0.5% to 2.5% in 2023 in-line with global trend toward slowing growth. Citibank expects Hong Kong’s property prices to drop another 10% from October until 2Q 2023. Citi thus joins Goldman, DBS, Morgan Stanley and HSBC in projecting lower house prices next year.
New Bond Issues
BoCom HK raised $200mn via a 3Y bond at a yield of 4.898%, 39bp inside initial guidance of T+100bp area. The senior unsecured bonds have expected ratings of A- by S&P. Proceeds will be used as working capital and for general corporate purposes. The new bonds are priced 15.2bp tighter to its existing 1.2% 2025s that yield 5.05%. It also raised RMB 1.42bn ($198.6mn) via a Dim Sum bond (Term of the Day, explained below) at a yield of 3.05%, 45bp inside initial guidance of 3.5% area.
Zhongyuan Asset Management raised $110mn via a 2Y bond at a yield of 7.5%, unchanged from initial guidance. The senior unsecured bonds have expected ratings of BB+ by Fitch. Proceeds will be used to refinance offshore debt and replenish working capital.
Barclays raised €1.25bn via a 11NC10 bond at a yield of 5.259%, 20bp inside initial guidance of MS+275bp area. The senior unsecured bonds have expected ratings of Baa2/BBB/A. Proceeds will be used for general corporate purposes and to strengthen its capital base.
Rakuten Group raised $500mn via a 2Y bond at a yield of 12%, unchanged from initial guidance. The senior unsecured bonds have expected ratings of BB+. Proceeds will be used for general corporate purposes, including funding for its mobile business and/or repaying debt. The new bonds are priced 114bp wider to its existing 3.546% 2024s that yield 10.86%. At the time of the new offering’s launch earlier this week, its dollar perps fell by over 10%
New Bonds Pipeline
- Korea Investment & Securities hires for $ Green bond
- Zhongrong International Trust hires for $ 367 mn Short 1Y bond
- Warner Bros. Discovery Inc. Outlook Revised To Stable From Positive On Slower Expected Deleveraging Amid Macro Headwinds
Term of the Day
Dim Sum Bonds
These are bonds denominated in offshore Renminbi (CNH) and issued outside China (mostly in Hong Kong). The first dim sum bond was issued in 2007 by China Development Bank – a 2Y offshore RMB bond in Hong Kong, with a 3% coupon and size of RMB 5bn ($750mn). These instruments get their name from dim sum, a popular delicacy in Hong Kong. Dim sum bonds are typically issued by issuers that have a need for Renminbi but do not want to go through regulatory approvals as dim sum issuance are not subject to regulatory approval from mainland China or Hong Kong, provided that they are sold to professional investors.
“Value has returned to the fixed income markets. Just thinking about nominal yields, we’ll start here in the United States, across the yield curve now, you could lock in a very high quality bond yield today. You could look for very high quality spread product, and very, very easily put together a portfolio up in the 6-6.5% type yield range, without taking a lot of exposure to economically sensitivity assets. Much better than cash, but also pretty good versus equities. So, those that have been in cash, looking for incremental return, fixed income’s looking quite attractive. So we do think it should be a call to action, these higher yield levels.”
“While high savings is likely to provide momentum to consumption and require higher interest rates, it’s certainly positive that we see that these households are wealthier, less financially constrained and better insured. But that said, reduced inflation will mean we have to incent saving over consumption.”
Praveen Korapaty, chief rates strategist at Goldman Sachs
“Our yield forecasts are based on that we see no recession and that we think inflation is still going to be above the Fed’s target… that in a non-recession scenario, with inflation above the Fed’s target, that the Fed would be easing… Inflation will remain somewhat above the Fed’s target over the next few years… So our yield forecasts are also a reflection of our view that inflation will be somewhat structurally higher. This cycle is different, not like those we’ve seen in the last 30 years.”
“The policy has reached a turning point, but it’s not necessarily marking a bottom for the industry. Restrictions on financing have been mostly removed, but it’s unclear if a large demand stimulus is coming… The seeds of today’s problem in the housing market were sowed in those years… It’s important to achieve soft-landing for the housing market… But soft-landing is a multi-year process”