US equity markets ended last week on a higher note with the S&P and Nasdaq up 1% and 0.9% on Friday. Sectoral gains were led by Utilities up 2.5% followed by Communication Discretionary up 2%. US 10Y Treasury yields tumbled 9bp at 2.89% on economic growth and recession worries. European markets also ended largely higher with the DAX and CAC up 0.2% and 0.1% respectively, while the FTSE was flat. Brazil’s Bovespa was up 0.4%. In the Middle East, UAE’s ADX closed 0.3% down on Friday and Saudi TASI was 0.5% lower on Sunday. Asian markets have also opened mix – HSI was down 0.6%, while Shanghai, STI and Nikkei up 0.1%, 0.9% and 6% respectively. US IG CDS spreads widened by 0.9bp and HY spreads were 2bp tighter. EU Main CDS spreads were 1.2bp wider and Crossover spreads were 10.7bp wider. Asia ex-Japan IG CDS spreads widened 7.2bp.
Sweden’s Riksbank raised its benchmark rate by 50bp to 75bp last week, the highest increase in the last two decades. The central bank expects policy rates to touch 2% by early 2023. On the inflation front, Eurozone inflation was at 8.6% in June, largely in-line with economists’ projections of 8.5% and higher than the 8.1% print in May. Inflation in Pakistan surged to 21.3% in June vs. 13.8% in May. This was also significantly higher than forecasts of a 17.9% print.
New Bond Issues
BNP Paribas S$ 10NC5 at 5.5% area
Mashreq Bank raised $300mn via a PerpNC5 AT1 bond at a yield of 8.5% as compared to initial guidance of low to mid 8%s. The bonds are unrated and received orders over $500mn, 1.7x issue size. The coupons are fixed until the first call/reset date of July 7, 2027 and if not redeemed, it resets then and every five years thereafter at the US 5Y treasury yield +544.8bp. This is Mashreq’s first ever AT1 offering in the international bond markets and the first AT1 issued from the UAE this year.
New Bonds Pipeline
- LG Chem hires for $ 3Y Green bond
- Korea Gas hires for $ 5Y/10Y bond
- Busan Bank hires for $ Social bond
- Continuum Energy Aura hires for $ Green Bond
- Rite Aid Corp. Upgraded To ‘CCC+’ From ‘SD’ Following Debt Repurchase; Outlook Negative
- Bed Bath & Beyond Inc. Downgraded To ‘B-‘ On Weak First-Quarter Results And Difficult Prospects; Outlook Negative
- Moody’s affirms Morocco’s Ba1 ratings, changes outlook to stable from negative
Term of the Day
Revolving credit is a form of borrowing where the credit line has a maximum limit but the borrower can access it in any quantum based on their funding needs. In a normal borrowing, once the loan has been repaid, the borrower must take a new loan to borrow more. In revolving debt, the borrower can re-access any funds that have been paid back too. Revolving debt generally comes with a higher interest rate and does not necessarily have a fixed coupon.
On Hot Inflation Keeping European Bond Funds on the Sideline
Vivek Bommi, head of European fixed income at AllianceBernstein
“Yields are now back to levels where people will start allocating to fixed income again.. A better entry point will be later in the year”
Steve Ryder, a sovereign portfolio manager at Aviva Investors
The market will “struggle to find an equilibrium” until the ECB starts to deliver hikes and there’s “more clarity around terminal rate expectations”
Carmignac fund manager Guillaume Rigeade
“We think it’s extremely optimistic to think that the ECB can kill inflation in a year”
On Risk of 2022 Recession Climbing, May Damp Inflation – Former Treasury Secretary, Larry Summers
“The risks of a 2022 recession are significantly higher than I would have judged six or nine weeks ago. If the economy did go into recession in the next six to nine months, then you’d probably see a reduction in inflationary pressures… You’d see the Fed probably feel that it had to push rates up less”.
On JPMorgan Cutting US Economic Growth Forecasts ‘Perilously Close’ to Recession
Michael Feroli, JPMorgan’s chief US economist
“Our forecast comes perilously close to a recession. However, we continue to look for the economy to expand, in part because we think employers may be reluctant to shed workers, even in a period of soft product demand.”