US Treasury yields inched higher late on Monday after a slight reversal in the risk-off sentiment. The 2Y yield rose 5bp to 3.98% (up 37bp from intraday lows) while the 10Y rose 3bp to 3.50%. The peak Fed funds rate climbed 2bp to 4.87% as markets continue to price in a 25bp hike at tomorrow’s FOMC meeting (72% probability). Goldman Sachs on the other hand expects the Fed to hold rates, contrary to most other street estimates. Bank stocks recouped some of the losses with the S&P 500 Banks Equity Index up 0.58% and most banks’ AT1s also trading higher following Monday’s sell-off (more details below). US IG and HY CDS spreads rose ~1bp each. US equity markets inched higher with the S&P and Nasdaq up 0.9% and 0.4% respectively.
European equity markets too staged a recovery. European main CDS spreads eased 1.8bp while Crossover spreads rose 7bp. Asia ex-Japan CDS spreads rose sharply by 7.3bp while Asian equity markets have opened in the green, led by the STI up 1.3%.
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New Bond Issues
New Bonds Pipeline
- Shinhan Bank hires for $ senior bond
- REC hires for $ Long 5Y Green bond
- Qatar plans for $ bond
Rating Changes
- Moody’s affirms the ratings of UBS Group AG (A3 Senior Unsecured) and changes outlook to negative
- Outlook On UBS Group Revised To Negative On Execution Risk From Credit Suisse Acquisition; Ratings Affirmed
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Moody’s places Credit Suisse Group ratings on review for upgrade
- Credit Suisse Placed On CreditWatch Positive On Acquisition By UBS; Tier 1 Hybrids Downgraded To ‘C’
- Fitch Upgrades PG&E Corp.’s and Pacific Gas and Electric’s IDRs to ‘BB+’; Outlook Stable
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.
