US 2Y Treasury yields dropped by 7bp while the rest of the curve saw a 2-3bp move lower. T-Bills however were were extremely volatile amid the debt ceiling impasse – the 1M bill yield hit a record high 5.89%, before easing back to 5.60%, to close 1bp lower on the day. More asset manager have come out noting that bonds are in vogue – State Street, Capital Group and T Rowe Price have spoken about fund flows coming back into fixed income with expectations that it will accelerate further.

The peak Fed Funds Rate moved 2bp higher to 5.19% with markets now expecting a 69% chance of a status quo at the Fed’s next meeting in June, thereby implying a 31% chance of a 25bp hike. Equity indices were closed lower with the S&P and Nasdaq down 1.1-1.3%. US IG CDS spreads widened by 1.7bp and HY CDS spreads widened by 7.8bp.

European equity markets ended higher. European main CDS spreads were 0.3bp wider and crossover CDS spreads were 2.1bp wider. Asia ex-Japan CDS spreads tightened by 2.6bp. Asian equity markets have opened mixed today.


New Bond Issues

  • Thomson Medical Group S$ 5NC1 at 5.75% area
  • Khazanah $ 5Y Sukuk/10Y at T+135/160bp area 

New Bond Issues 24 May 23

Caixabank raised €1bn via a 11NC6 bond at a yield of 6.138%, 30bp inside initial guidance of MS+330bp area. The Tier 2 notes (Term of the Day, explained below) have expected ratings of Ba1/BBB-/BBB- and have a 75% clean-up call. Proceeds will be used for general corporate purposes.

China Construction Bank (CCB) Sydney raised $500mn via a 3Y Green bond at a yield of 4.581%, 40bp inside initial guidance of T+95bp area. The bonds have expected ratings of A1 (Moody’s), and received orders over $2.6bn, 5.2x issue size. Proceeds will be used to finance/refinance loans to customers involved in, as well as the bank’s own operational activities in eligible green projects.

Majid Al Futtaim Group (MAF) raised $500mn via a 10Y Green Sukuk bond at a yield of 5.126%, 35bp inside initial guidance of T+175bp area. The senior unsecured bonds have expected ratings of BBB/BBB (S&P/Fitch), and received orders over $3bn, 6x issue size. Proceeds will be used to fund or refinance a portfolio of existing eligible projects as set out in the MAF group’s Green Finance Framework.

Kubota raised $500mn via a 3Y bond at a yield of 4.958%, 37.5bp inside initial guidance of T+130bp area. The senior unsecured bonds have expected ratings of A (S&P) and have a 1-month par call. Proceeds will be used for general corporate purposes. 


New Bonds Pipeline

  • BGK hires for $ 10Y bond
  • GS Caltex hires for bond


Rating Changes

  • Fitch Upgrade British Airways Plc to ‘BB+’; Stable Outlook
  • SoftBank Group Downgraded To ‘BB’, Subordinated Bonds To ‘B’ On Higher Asset Risk; Outlook Stable

  • Singapore Post Downgraded To ‘BBB’ from ‘BBB+’ On Weakening Business Prospects; Outlook Negative
  • Fitch Revises Ecuador’s Outlook to Negative; Affirms IDR at ‘B-‘

Term of the Day

Tier 2 Bonds

Tier 2 bonds are debt instruments issued by banks to meet their regulatory tier 2 capital requirements. Tier 2 capital (and thus tier 2 bonds) rank senior to tier 1 capital, which consists of common equity tier 1 (CET1) and additional tier 1 (AT1) capital. CET1 consists of a bank’s common shareholders’ equity while AT1 consists of preferred shares and hybrid securities or perpetual bonds. Tier 2 capital consists of upper tier 2 and lower tier 2 wherein the former is considered riskier to the latter. From a bond investor’s perspective, tier 2 bonds are senior, and therefore less risky compared to AT1 bonds as AT1s would be the first to absorb losses in the event of a deterioration in bank capital, as was the case with Credit Suisse.


Talking Heads

On Big investors rushing into bonds after ‘cataclysmic’ year

Yie-Hsin Hung, the CEO of State Street Global Advisors

“We’re seeing enormous moves into fixed income. It feels like the beginning stages of what happened in equities, moving much more into passive”

Sebastien Page, CIO of T Rowe Price’s global multi-asset strategy

“Bonds are exciting again, for the first time in a long time. They were boring with zero rates for several years… yields are much higher than they were “

Mike Gitlin, global head of fixed income at Capital Group

“I think you’ll see $1tn flow back into the bond market in the next few years… I think it’s coming and I think you’ll see it accelerate”

On labor costs becoming more prominent in inflation – Former Fed Chairman Ben Bernanke

“Over time a very tight labor market has begun to exert increasing pressure on inflation … That share is likely to grow and will not subside on its own… traces its origin to overheating of labor markets can only be reversed by policy actions that bring labor demand and supply into better balance.”

On ‘Several’ Interest-Rate Hikes Still Needed – ECB’s Nagel

“The course of monetary policy tightening has not yet come to an end. everal rate hikes will still be necessary to reach a sufficiently restrictive level. And we will then have to maintain this level for a sufficiently long time. Until inflation has come down.”


Top Gainers & Losers – 24-May-23*

BondEvalue Gainer Losers 24 May 23

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