US Treasury bond yields were mixed on Friday with the 2Y down 1bp to 4.20%, 10Y flat at 3.79% and 30Y 3bp higher to 3.72%. The peak Fed Funds Rate currently stands at 4.47% for the FOMC’s March 2023 meeting, unchanged from last Friday. US credit markets saw a slight widening of CDS spreads, with IG wider by 0.2bp and HY moving 6.9bp higher. US equity markets continued its downtrend with the S&P and Nasdaq down 1.5%. Consumer spending in the US for August increased 0.4% vs. expectations of 0.2%; it fell by 0.2% in July.
European equity markets were broadly positive by ~1% and credit markets saw EU Main CDS spreads tighten by 3.9bp and Crossover spreads 21.1bp tighter. Asia ex-Japan CDS spreads tightened 0.4bp and Asian equity markets have opened mixed today. Emerging market (EM) bond funds witnessed $70bn of outflows YTD on the back of higher interest rates in major economies and the strong dollar. In the last week, investors sold $4.2bn from EM bond funds as per an analysis by JPMorgan of data from EPFR Global. For 2022, JPMorgan now projects $80bn of EM bond outflows against previous forecasts of $55bn. Meanwhile, Sri Lanka’s inflation in September surged to a record 69.8%, higher than forecasts of 67% and August’s print of 64.3%, driven by transport cost and food prices that rose 150.4% and 94.9% respectively.
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New Bond Issues
Jiangning Jingkai Overseas Investment raised $93.5mn via a 364-day bond at a yield of 5.35%, 10bp inside the initial guidance of 5.45% area. The senior unsecured bonds are unrated and are supported by a letter of credit from the Bank of Shanghai Nanjing branch. Nanjing Jiangning Economic and Technological Development Group has provided a keepwell.
New Bonds Pipeline
- Public Investment Fund hires for $ Green bond
- Aozora Bank hires for $ 3Y Green bond
Rating Changes
- Turkiye Ratings Lowered To ‘B’ From ‘B+’; Outlook Stable
- Moody’s downgrades Ghana’s rating to Caa2 and places it on review for downgrade
- Moody’s places Fosun’s B1 rating on review for downgrade
- Fitch Places CIFI on Rating Watch Negative
Term of the Day:
Margin Call
In leveraged trades, a trader essentially borrows money from a brokerage firm to upsize the position. Due to the leverage given by a broker, the trader is required to put up a certain sum of money up to a threshold in a margin account so that the broker has some collateral. The threshold is known as ‘maintenance margin’. If the leveraged securities rise in value, the trader is at an advantage since the gains get added to the margin account. Here, the broker does not reap any reward, but is more certain about being paid back in full. However, if the securities fall in value and go below the threshold, the broker triggers a margin call. The margin call is the amount that the trader has to add back to top-up their margin account since the margin account’s value has gone below the threshold/maintenance margin requirement.
Regarding the sell-off in UK gilts earlier last week, it is said that Liability Driven Investors (LDIs) like pension funds had exacerbated the move on the long-end after having received margin calls.
Talking Heads
“Credit market dysfunction starts beyond this point”… Measure of credit stress at a “borderline critical zone”… A Fed slowdown and possible pause would “allow the economy to fully adjust to all the extreme tightening already implemented, but still working its way through the financial system’s plumbing”.
On Credit Market Moving Toward Breaking Point as Investors Flee, Sales Flop
Tracy Chen, PM at Brandywine Global Investment
“The market is dislocated and financial stability is at risk. Investors are going to test central bank resolve”
Manuel Hayes, Senior PM at Insight Investment
“You are really starting to see CCC pricing in concerns for a recession”
Scott Kimball, MD at Loop Capital Asset Management
“A recession is a forgone conclusion, if we aren’t tipping into one already”
On UK Regulators Meeting to Prevent New Gilt Selloff – FT
A spokesperson for The Pensions Regulator
“We are monitoring the situation in the financial markets closely to assess the impact on defined benefit pension scheme funding… We again call on trustees of defined benefit schemes and their advisers to continue to review the resilience and liquidity of their investments, risk management and funding arrangements, and plan accordingly to protect the interest of scheme members.”
We think about the current status as something from that movie “Super Size Me.” You’ve done three 75 basis-point supersized rate hikes; you might do a fourth in November… It was clear the policy mismatch between the new Truss government and Kwasi Kwarteng, the chancellor of the Exchequer, and where the Bank of England felt it needs to go… Basically from our point of view, these kinds of bear markets — and if you go back to the highs in January — they don’t move in straight lines”
Top Gainers & Losers – 03-October-22*
