US Treasuries sold off on Friday’s risk-on sentiment after a strong jobs report. US 2Y yields jumped 14bp to 3.93% and 10Y yields were 5bp higher at 3.44%. US Non-Farm Payrolls came at 253k for April, higher than the surveyed 185k. The prior month’s NFP print was revised lower to 165k from 236k. Unemployment was at 3.4%, lower than the surveyed 3.6%. Average Hourly Earnings YoY was at 4.4%, higher than the surveyed 4.2% and last month’s revised 4.3% print.

The peak Fed Funds Rate was up 3bp to 5.08% and CME probabilities continue to expect no change in policy rates at the Fed’s June meeting. After a strong risk-off sentiment across the banking sector earlier last week, the market saw a rebound on Friday. The S&P bank index gained 3.2%, while the overall S&P and Nasdaq indices rose 1.9% and 2.3% respectively. Also, US IG and HY CDS spreads were tighter by 2.7bp and 15.3bp respectively.

European equity markets ended ~1% higher. European main CDS spreads were tighter by 3.7bp and Crossover spreads tightened 18.5bp. Asia ex-Japan CDS spreads also tightened by 4.7bp. Asian equity markets have opened in the green today.


New Bond Issues

New Bond Issues 8 May 23

Verizon raised $1bn via a 10Y green bond at a yield of 5.07%, 27.5bp inside initial guidance of T+190bp area. The bonds have expected ratings of Baa1/BBB+/A-. Proceeds will be used for the development, construction or operation of renewable energy facilities, or the purchase of renewable energy with regards to its power purchase agreements, including new and existing investments. Verizon intends to allocate a majority of the net proceeds within three years. The new bonds offer a new issue premium (and a negative greenium) of 5bp over its older 4.5% conventional bonds due August 2033.


New Bonds Pipeline

  • Korea Credit Guarantee Fund hires for $ 3Y Social bond
  • Melbourne Airport hires for € 10Y bond
  • Eximbank China hires for $ 3Y bond


Rating Changes

  • Mercedes-Benz Group AG Upgraded To ‘A’ On Continued Robust Margins And Cash Flow Expectations; Outlook Stable
  • Fitch Downgrades Egypt to ‘B’; Outlook Negative
  • Moody’s downgrades Dalian Wanda Commercial Management and Wanda HK’s ratings; ratings on review for further downgrade
  • Greentown China Holdings Outlook Revised To Positive On Strengthening Business Profile; ‘BB-‘ Rating Affirmed

Term of the Day

Preference Shares

Preference shares are a type of security issued by corporates that has features of both bonds and common stock. In terms of capital structure, preference shares pay dividends and have seniority over common stock but are subordinated to bonds. They do not have voting rights unlike common equity and pay dividends out of each year’s net profits. There are various types of preference shares – non-cumulative, redeemable/irredeemable, convertible, participating etc. In the case of cumulative preference shares, the company can pay cumulative dividends in the following year if the particular year’s profits are not enough. Preference shares may differ from AT1s. For example, they are based on the income statement while AT1s are balance sheet based. For instance, a bank making a loss after tax in a year may be able to pay interest on AT1s if capital levels are satisfactory but not dividends on preference shares. Alternatively, a bank making some profits could pay preferred dividends but may not be able to pay up on AT1s if capital levels are unsatisfactory and thus may get triggered. Differences of preference shares as against perpetual bonds, may include characteristics like step-ups etc. besides capital structure seniority of the latter.

Bloomberg reports that the issuance of preference share by US banks is at its lowest since 2018 amid rising costs after the latest banking sector fallout.


Talking Heads

On Bond Traders Betting on Biggest Fed Shift in Decades on Credit Risks

Kathy Jones, chief fixed-income strategist at Charles Schwab

“If the credit tightening trend continues, it’s going to be difficult to sustain strong economic growth. Eventually, lower rates are going to be needed”

Roger Hallam, global head of rates at Vanguard

“The Fed does recognize there is clearly significant stress within the banking sector. Although a systemic crisis has been avoided, challenges are still to be resolved”

Rick Rieder, CIO fixed income at BlackRock

“The extremes you are seeing are intense. The only way I’ve found fruitful has been to fade the extreme”

On Emerging Markets Entering Into High-Anxiety Phase With Turkey Vote

Sergey Dergachev, the head of EM corporate debt at Union Investment Privatfonds

“Should one political risk factor suddenly heat up, it can catch investors by surprise”

Simon Quijano-Evans, chief economist at Gemcorp Capital Management

“Governments everywhere need to work on pulling energy and food prices down in line with wholesale prices, lest they turn into existential threats for their electorates and a subsequent threat to political stability”

On Wall Street in No Mood to Celebrate the Fed’s Last Rate Hike

Nadia Lovell, senior equity strategist at UBS Global Wealth

“Historically what you’d do is buy the last hike, because normally you see the market rally from there… you have inflation that is still high, you have concerns within the banking system and some fragility around there”

Christian Mueller-Glissmann, head of asset allocation research at Goldman Sachs

“Markets are usually pricing the cuts before the recession is happening, but there are often false signals and current priced cuts appear too large”


Top Gainers & Losers – 08-May-23*

BondEvalue Gainer Losers 8 May 23

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