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US Treasury yields were higher by 4-6bp across the curve yesterday. Markets await the FOMC decision later today where the Fed is expected to keep rates steady with the Fed Funds range at 5.25-5.50%. The Fed’s dot plot will also be published and its guidance on the policy action during its November meeting is expected to be a key factor. CME probabilities currently show that markets expect the Fed to keep rates on hold in November with a 71% probability, up from 56% a week earlier. In credit markets, US IG CDS spreads were 0.1bp wider while HY spreads widened by 1.5bp. The S&P and Nasdaq were 0.2% lower on Tuesday.
European equity markets ended mixed yesterday. In credit markets, European main CDS spreads were tighter by 0.1bp while crossover spreads widened 1.5bp. Asian equity markets have opened lower this morning and Asia ex-Japan CDS spreads have tightened 0.8bp.
BNP Paribas raised €1.5bn via a 9NC8 senior preferred bond at a yield of 4.217%, 25bp inside initial guidance of MS+120bp area. If uncalled after 8 years, the coupon will reset at the 3M Euribor plus a spread of 95bps and will be paid quarterly. The bonds have expected ratings of Aa3/A+/AA-, and received orders over €2.25bn, 1.5x issue size.
Danske Bank raised $1.25bn via a 3NC2 senior preferred bond at a yield of 6.259%, 27bp inside initial guidance of T+145bp area. If uncalled after 2 years, the coupon will reset at the 1Y US Treasury rate plus a spread of 118bps.The bonds have expected ratings of A3/A+/AA-. Proceeds will be used for general corporate purposes.
Collateralized Loan Obligations (CLO) are securities backed by a pool of underlying loans. The loans are packaged together by a process of securitization. The loans are bundled together in tranches in an order of risk – for example, the AAA rated tranche comes with the lowest default risk while a BB tranche has a higher default risk. Investors can choose the tranche they prefer based on risk appetite. Given that the underlying loans are floating rate loans, they are also considered a hedge against inflation.
Janus Henderson’s AAA CLO ETF has seen its AUM jump to a record $3.9bn since its launch in October 2020.
On Dollar Rally Crushing One of the Most Popular Trades of 2023
Mark Nash, Jupiter Asset Management
“The dollar is a beast again”
Charles Diebel, head of fixed income at Mediolanum International Funds
“If you put a gun to my head, I would probably still favor a weaker dollar over the next six to 12 months… for the next three months, I am not so convinced. It could probably strengthen a bit more”
Kit Juckes, a strategist at SocGen
“The only positive I can think of for the euro and the sterling is that expectations about UK and eurozone growth are already dire relative to the US”
On Sunac, Country Garden debt deals bringing respite for China’s property sector
Gary Ng, senior economist at Natixis
“”I will treat it as a positive … We haven’t seen much progress on the offshore market, so this shows at least some Chinese developers are trying to reach an agreement”
ANZ Senior China Economist Betty Wang
“However, the pace and the extent of such a turnaround will be much smaller than in previous cycles. It’s also questionable whether it will kick off a sustainable rebound, especially considering the uncertain job outlook, deteriorating income inflows, a shift in expectations, and potential increase in housing supply in the long-term.”
On AllianceBernstein Joining Bond Bulls Camp With 2.5% Call on Yields
“Risk-reward to us looks attractive to own 10-year yields at today’s levels… real question is how long is the Fed going to keep rates at these elevated levels? There’s certain pockets in the US economy, they’re probably going to struggle if the Fed doesn’t cut rates next year… valuations are good and if we get it wrong and inflation surprises to the upside, you’re probably going to get better to add more duration”… 10-year US yields will probably drop to between 2.5% and 3% next year.