US Treasuries eased slightly on Monday by 2-4bp across the curve. The peak Fed funds rate was down 2bp to 4.93% for the June 2023 meeting, despite two Fed speakers indicating that they would favor seeing the Fed raising rates above 5% this year. The probability of a 25bp hike at the FOMC’s February 2023 meeting stands at 80% vs. 76% yesterday. US equity markets ended mixed with the S&P down 0.1% and Nasdaq up 0.6% respectively. US IG and HY CDS spreads were 0.05bp and 1.9bp wider.
European equity markets ended higher. The European main and crossover CDS spreads tightened by 2bp and 8.1bp respectively. Asian equity markets have opened lower today. Asia ex-Japan CDS spreads tightened by 3.3bp.
New Bond Issues
- SK Hynix $ 3Y/5Y SLB/10Y Green at T+280/315/360bp area
- Mongolia $ 5Y at 9.625% area
- AIIB $ 5Y at SOFR MS+65bp area
- India Exim Bank $ 10Y Sustainability at T+220bp area
BNP Paribas raised $1.75bn via a 6NC5 bond at a yield of 5.125%, 30bp inside initial guidance of T+175bp area. The senior preferred bonds have expected ratings of Aa3/A+/AA-.
Philippines raised $3bn via a three-tranche deal. It raised:
- $500mn via a 5.5Y bond at a yield of 4.743%, 40bp inside initial guidance of T+155bp area
- $1.25bn via a 10.5Y bond at a yield of 5.001%, 40bp inside initial guidance of T+195bp area. The new bonds were priced at a new issue premium of 6bp over its older 5.6009% bonds due April 2033 that yield 4.94%
- $1.25bn via a 25Y sustainability bond at a yield of 5.5%, 45bp inside initial guidance of 5.95% area. The new bonds were priced at a new issue premium of 7bp over its older 5.95% sustainability bonds due October 2047 that yield 5.43%
The senior bonds are rated Baa2/BBB+/BBB, and received orders over $25bn, 8.3x issue size. Proceeds from the sustainability bond will be used to finance and refinance assets in-line with their sustainable finance framework. Proceeds from the 5.5Y and 10.5Y bonds will be used for general budget financing.
Posco raised $2bn via a three-trancher. It raised:
- $700mn via a 3Y bond at a yield of 5.845%, 35bp inside initial guidance of T+225bp area
- $1bn via a 5Y bond at a yield of 5.865%, 35bp inside initial guidance of T+255bp area
- $300mn via a 10Y bond at a yield of 6.03%, 45bp inside initial guidance of T+295bp area
The senior bonds are be rated Baa1/A- (Moody’s/S&P) and received orders over $17.5bn, 8.8x issue size. Proceeds will be used for refinancing and general corporate purposes.
Sunny Optical Technology Group raised $400mn via a 3.5Y sustainability-linked bond (SLB) at a yield of 6.018%, 30bp inside initial guidance of T+235bp area. The senior bonds received orders over $1.35bn, 3.4x issue size. APAC took 88% and EMEA 12%. Of this, asset/fund managers took 64%, banks/financial institutions took 14%, SWFs took 11%, insurers/pension funds 7% and private banks 4%. If the company fails to (a) achieve its target to reduce GHG intensity by 20% by 2025 versus a 2021 baseline or (b) fails to publish the sustainability performance report for 2025 or (c) relevant verification assurance confirmation by 30 April 2026, it will redeem the outstanding bonds at a price of 100.5. Proceeds will be used for refinancing purposes.
Air France-KLM raised €1bn via a two-tranche deal. It raised
- €500mn via a 3Y bond at a yield of 7.375%, 37.5bp inside initial guidance of 7.75% area. The new bonds are priced 15.5bp wider to its existing 3.875% 2026s that yield 7.22%.
- €500mn via a 5Y bond at a yield of 8.25%, 25bp inside initial guidance of 8.5% area.
Proceeds from the senior unsecured, sustainability-linked bonds will be used for general corporate purposes, including partial redemption of the French state-guaranteed senior bank loan granted in May 2020.
Santander raised €5bn via a three-tranche deal. It raised
- €2bn via a 2Y FRN at a yield of 2.804%, 25bp inside the initial guidance of 3m Euribor+80bp area.
- €1.75bn via a 3Y bond at a yield of 3.864%, 25bp inside the initial guidance of MS+105bp area.
- €1.25bn via a 5Y bond at a yield of 3.991%, 25bp inside initial guidance of MS+135bp area.
The senior preferred bonds have expected ratings of A2/A+/A.
New Bonds Pipeline
- Woori Bank hires for $ 3Y Sustainability or 5Y Sustainability bond
- ICBC HK hires for $ FXD bond
- ICBC Dubai hires for $ FRN bond
- Bed Bath & Beyond Inc. Upgraded To ‘CC’ From ‘SD’ On Terminated Debt Exchange Offer; Outlook Negative
- Southwest Airlines Outlook Revised To Stable From Positive On Weaker-Than-Expected Funds From Operations, ICR Affirmed
Term of the Day
Catastrophe bonds also referred as Cat bonds are risk-linked securities that are designed in favor of the issuer as these allow the transfer of risks related to a catastrophe or a natural disaster to the investors. These are generally high yield debt instruments that payout to issuers in case of specific triggers. These bonds essentially act as insurance policies for the issuer against natural disasters, where they pay regular coupons (premium) in exchange for protection. In the event of a disaster trigger, issuers will receive a payout from the proceeds of the bond and the principal repayment and interest payments are either deferred or cancelled. If a trigger event doesn’t occur, the issuer continues to pay the coupons as scheduled, similar to a regular bonds and proceeds are returned to the investors at maturity. Cat bonds are generally purchased by governments, insurance and reinsurance companies. These bonds have gained traction as the frequency of natural disasters is on the rise.
Insurer Beazley has launched the first cyber catastrophe bond where the $45mn private bond will pay out to Beazley if total claims from a cyber attack on its clients exceed $300mn.
On Fed to size up next rate hike with eye on inflation
Atlanta Fed Bank President Raphael Bostic
Have to take a 25bp move “more seriously and to move in that direction”… “Eventually I want us to get to 25” basis point rate hikes, he said. “The specific timing of that is going to be a function of the data that comes in.”
San Francisco Fed President Mary Daly
Both 25 and 50 basis point rate hikes are “on the table” for her. Expects the Fed policy rate – now at 4.25-4.5% – to need to rise to a 5-5.25% range to do the job on inflation.
On Hedge Funds Boost Dollar Shorts on Bets for Slower Fed Hikes
John Bromhead, a strategist at ANZ Banking Group
“Pillars of dollar strength are starting to recede. Last week’s minutes show the Fed is approaching terminal rate and will be pausing soon.”
Union Investment’s head of fixed income Christian Kopf
“I think we’re in for a big divergence in monetary policy between the US and Europe in 2023”
On Equities, bonds ETFs drawing in near-record amounts of cash in 2022: BlackRock
Karim Chedid, BlackRock’s EMEA head of investment strategy for its iShares unit
“If you look at the market context for 2022, on the surface you would expect that the flows would have been more muted, because stocks and bonds declined by double digits compared to 2021… But we have seen the second-best year for ETF flows on record, only behind 2021. This shows the acceleration of ETFs as an investment vehicle of choice in 2022”