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US Treasury yields were broadly steady across the curve as markets await the US CPI figures tonight. Forecasts point to a 3.3% YoY rise as compared to a 3% in June. Meanwhile, Core CPI is expected to cool to 4.7% YoY from 4.8% in June. Separately, Philadelphia Fed President Patrick Harker, a voting member, said that they may be able to hold rates steady so long as there are no surprises in the economy. However he pointed out that rates will need to stay elevated for some time. US IG credit spreads were tighter by 0.7bp and HY CDS spreads tightened by 0.5bp. The S&P and Nasdaq were down 0.7% and 1.2% respectively.
European equity markets ended higher on the other hand. In credit markets, European main CDS spreads were 1.4bp tighter and Crossover CDS tightened 2.7bp. Asia ex-Japan CDS spreads tightened by 0.3bp. Asian equity markets have opened broadly weaker this morning. China has slid into deflation territory with its CPI for July at -0.3% YoY compared to a 0% change in June. This compares to forecasts of a -0.4% print. Its PPI saw a much larger -4.4% YoY print, worse than forecasts of a -4.1% drop but slower than the -5.4% number seen in the month prior.
BMW raised $3bn via a four-part deal, with details in the table below:
The senior unsecured bonds have expected ratings of A2/A. All the fixed rate bonds come with make-whole calls while the 5Y and the 10Y also have a 1-month par call and 3-month par call respectively. Proceeds will be used for general corporate purposes. The new 2Y fixed rate notes offer a new issue premium of 15.3bp over its existing 3.25% 2025s yielding 5.15%.
China Life Insurance raised $2bn via a 10NC5 bond at a yield of 5.35%, 45bp inside initial guidance of 5.8% area. If uncalled after 5 years, the coupon will reset on the first reset date and every 5 years thereafter, at the US 5Y Treasury rate + 123.2bp. The subordinated bonds have expected ratings of A- (S&P), and received orders over $6bn, 3x issue size. Proceeds will be used to supplement the issuer’s capital.
Kung-fu bonds are offshore USD denominated bonds issued by Chinese issuers, aka Chinese dollar bonds. These issuances offer a source of funding from offshore markets for local borrowers and help build an international investor base. The Kung-fu bond market has been primarily dominated by government related institutions, banks and real estate developers.
On Treasury yields edging lower over time as Fed shifts to Cuts
Mark Cabana, BofA
“Treasury yields are primed to edge lower over time as the Federal Reserve keeps interest rates higher for longer before eventually cutting at a slower pace than markets expect.”
“Recommends trading the back end of the Treasury curve with a “tactical long bias.”
Patrick Harker, President of Federal Reserve Bank of Philadelphia
“US central bank may be able to cease interest-rate increases, barring any surprises in the economy, though rates would need to stay at their current elevated levels for some time.”
On US Inflation Gauge Casting Doubts About Fed Victory
Ed Al-Hussainy, rates strategist at Columbia Threadneedle Investments.
“Inflation has come down, because the Fed has acted aggressively — and yet there is a risk that underlying inflation expectations have shifted higher. Markets have embedded in higher inflation expectations for the foreseeable future and also higher real rates.”
On Wall Street’s Demand for 20-Year Treasuries
Michael Collins, a fund manager at PGIM
“You want to own as much of the 20-year Treasury as you can get your hands on. Twenty-year debt is trading cheap and you’re going to monetize that if you short 10s, 30s and go long 20s.”
On ‘Buy the dip’ in China due to stronger China stimulus that could power multi-month rally: BofA
Winnie Wu , BofA Securities equity strategist
“We are hopeful of a potential rally, and advise investors to ‘buy the dip’ in the coming weeks. The uptrend could last several months if the government can quickly launch an effective property stimulus that can make property desirable again… Chinese stocks may not be a long-term hold, but trading vehicles. For global investors it is impossible to completely shy away from Chinese stocks”