US equity markets ended mixed on Tuesday with the S&P up 0.2% while Nasdaq was down 0.2%. Sectoral gains were led by Consumer Staples, up 1.2% and Consumer Discretionary rising by 1.1% while Real Estate was down 0.4%. US 10Y Treasury yields rose by 4bp to 2.82%. European markets were in the green – DAX, CAC and FTSE were up 0.7%, 0.3% and 0.4% respectively. Brazil’s Bovespa was up 0.4%. In the Middle East, UAE’s ADX was down 0.2% while Saudi TASI was flat. Asian markets have opened higher – Shanghai, HSI, Nikkei and STI were up 0.3%, 0.8%, 0.8% and 0.3% respectively. US IG CDS spreads widened 1.9bp and US HY spreads were wider by 11.2bp. EU Main CDS spreads were 2.3bp wider and Crossover spreads were 10.2bp wider. Asia ex-Japan IG CDS spreads tightened 5.7bp.
US manufacturing output rose 0.7% MoM in July vs. estimates of 0.2% and a contraction of 0.4% in June. Strong demand for goods drove output higher by 3.2% YoY.
New Bond Issues
Longnan Tourism Development and Investment Group $ 35-month bond, final at 6%
Goldman Sachs raised $2.5bn via a 6NC5 bond at a yield of 4.482%, 23bp inside initial guidance of T+175bp area. The senior unsecured bonds have expected ratings of A2/BBB+. Proceeds will be used for general corporate purposes. The new bonds are priced at a new issue premium of 5.2bp vs. its existing 3.615% 2028s that yield 4.43%.
Ford Motor raised $1.75bn via a 10Y Green bond at a yield of 6.1%, 27.5bp inside initial guidance of 6.375% area. The senior unsecured green bonds have expected ratings of Ba2/BB+/BB+. Proceeds will be used to finance its Clean Transportation projects and the design, development, and manufacture of its battery electric vehicle (BEV) portfolio. The new bonds are priced at a new issue premium of 51bp vs. its existing 3.25% green 2032s that yield 5.59%. The bonds are also priced wider compared to its older non-green 7.45% 2031s that are yielding 6.01%, indicating a negative greenium of 9bp.
New Bonds Pipeline
- Energy Development Oman hires for $ sukuk
- Tianjin Binhai New Area Construction & Investment hires for $ bond
- NH Investment hires for $ 3Y and/or 5Y Green bond
Term of the Day
Stagflation refers to a period of (stag)nant economic growth and high in(flation). It is an economic phenomenon when economic growth is stagnant and the unemployment rate and inflation are high. Stagflation is most commonly caused by supply shocks leading to higher commodity prices or monetary policies that increase money supply in the economy too quickly. An example of stagflation was in the US during the 1970s, when high inflation and high unemployment was at its peak on the back of a surge in commodity prices. Generally. monetary and fiscal policies are not effective at solving economic problems related to a supply side shock, hence it is tougher to get through a period of stagflation.
On Bond Markets Bedeviling the Fed by Actually Easing Financial Conditions
Mike Sewell, a portfolio manager T. Rowe Price
“Without tightening financial conditions further, inflation can ease further, but not back to the Fed’s 2% target. You need to see higher real and nominal yields along with a stronger dollar — that’s what helps the Fed tighten financial conditions.”
John Madziyire, senior portfolio manager at Vanguard
“The Fed is in a difficult position and words are not enough… They need to move rates higher or provide credible guidance that the bond market buys into.”
Mark Kiesel, global credit chief investment officer at PIMCO
“There is a risk the Fed gets more restrictive and gets to 4% or higher”
On Jim Chanos Saying the Market Believes Fed Will Ease in Early 2023
The market already “believes” the Fed will be easing monetary policy in early-2023. The “strategists” who are staking out this “variant perception” seem not to be aware of the futures markets.
On Barclays Warning of Credit Pain in Return to 1970s Inflation Regime
“Credit performance was poor then, and we do not expect this time to be different…. could experience even more pain if the current stagflationary backdrop develops into a deflationary one…. Stagflationary environments have not been kind to credit, with returns being negative on average when the growth backdrop deteriorates”
On Plans for State-Guaranteed Bond Deals for Chinese Developers
Owen Gallimore, head of APAC credit analysis at Deutsche Bank
“The mooted state-supported onshore bond issuances are undoubtedly a positive for these developers and the broader sector and signal the government’s continued willingness to evolve policy”
JPMorgan analysts including Karl Chan
“We believe investors will likely remain skeptical until further proof that these few private developers will enjoy continual funding support from government