US Treasury yields pulled back following a sell-off immediately after the strong jobs report on Friday. While 2Y yields jumped over 20bp post the jobs report, they later retreated to end just 3bp higher. The 10Y yield jumped over 12bp and is now 1bp lower at 3.53%. The peak Fed Funds rate however moved 6bp higher to 4.94% for the May 2023 meeting. US Non-Farm Payrolls (NFP) for November came at 263k, higher than the forecasted 200k print. The unemployment rate was unchanged at 3.7%. The probability of a 50bp hike at the FOMC’s December meeting remains steady at 78%. US IG and HY CDS spreads widened 2.1bp and 4.6bp respectively. US equity markets ended mixed with S&P down 0.1% and Nasdaq up 0.2%.
European equity markets ended mixed. EU Main CDS spreads tightened 3.9bp and Crossover spreads widened by 0.8bp. Asian equity markets have opened higher today across the board. Asia ex-Japan CDS spreads widened by 2.8bp.
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New Bond Issues
New Bonds Pipeline
- Korea Investment & Securities hires for $ Green bond
- Zhongrong International Trust hires for $367mn Short 1Y bond
Rating Changes
- Fitch Downgrades WeWork to ‘CCC’
- Agile Group Downgraded to Caa1 by Moody’s
- Twitter Inc. Ratings Withdrawn On Insufficient Information To Maintain The Ratings
- ReNew Power ‘BB-‘ Ratings Withdrawn At The Issuer’s Request
Term of the Day
Covered Bond
Covered bonds are senior secured debt instruments that are typically issued by banks. These bonds are secured (i.e. covered) by a pool of assets referred to as the “cover pool”, which typically consists of mortgages or loans. In an event that the bank defaults, holders of covered bonds have a preferential claim to the cover pool, which ensures interest payments and repayment of principal. This makes covered bonds relatively more secure vs. other debt and therefore results in a higher credit rating. While they have similarities with Mortgage-Backed Securities (MBS) in terms of the pool of assets there is a difference – the transfer of mortgages to an Special Purpose Entity (SPE) in a MBS issue means that the issuing bank no longer bears the risk of the loans and the mortgage pool is static. This is in contrast to Covered Bonds where, because the mortgage pool is constantly adjusted to maintain the pool size, the issuing bank bears the credit risk of the mortgages.
Credit Suisse last week raised via a 3Y covered bond at a yield of 3.39%
Talking Heads
On NFP Results Beating Expectations
Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities
“The market was mispriced. Two-year yields probably belong near 4.75% with the Fed set to raise rates by another 50 basis points this month. The reaction to Powell’s comments took the anticipated downsizing in rate hikes too far”
Jason Pride, CIO of Private Wealth at Glenmede
“This employment report fails to provide the picture the Federal Reserve would prefer to feel that they are making progress in slowing the economy”
Mike Bailey, director of research at FBB Capital Partners
“This is exactly the wrong report at the wrong time. Investors started getting comfortable after Powell’s remarks on Wednesday that we had a favorable glide path to year end.”
On Bonds Rallying Back From Brutal Year Showing Power of Higher Rates
Jack McIntyre, a portfolio manager at Brandywine Global Investment Management
“The coupon is becoming a more meaningful source of return now… The bond math is turning into a tailwind… While inflation is coming down, it’s got a long way to go. We don’t know when and whether we need a meaningful recession to achieve that.”
Kathryn Kaminski, chief research strategist and portfolio manager at AlphaSimplex Group
“The trend of higher rates is definitely not going to go away overnight. But we have seen volatility continually increasing throughout the year. So the relative strength of the bearish signal relative to volatility has become less strong.”
On new projections may show the cost as Fed plans path – Jefferies economist Thomas Simons
“The Fed has been telling us that getting unemployment higher and wage growth lower is going to take a prolonged period of restrictive policy, and today’s data provides more evidence to that effect. This does not take the Fed off track for the widely expected 50 (basis point) rate hike at the upcoming…meeting, and it gives us greater confidence in our expectation that the terminal rate will top 5% next year.”
Top Gainers & Losers – 05-December-22*
