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US Treasury yields were broadly flat on Tuesday. The NFIB Small Business Optimism Index in the US increased 1.3 points in December to 91.9. It was the first increase since July and matched that month’s reading, but was still below its 50-year average of 98 for a 24th-straight month. Separately, PIMCO in its latest cyclical outlook noted that bond investors can still reap equity-like returns in 2024 if the current economic conditions persist. This is despite the decline in yields from recent highs. US credit markets saw IG CDS spreads tighten by 0.5bp and HY spreads tighten 1.3bp. US equity markets closed mixed, with the S&P down 0.2% and the Nasdaq up 0.1% respectively.
European equity markets ended slightly lower. Credit markets in the region saw the European main CDS spreads tighten by 0.8bp and crossover spreads tighten by 4bp. Asian equity markets have opened weaker today. Asia ex-Japan IG CDS spreads tightened by 3bp.
OCBC raised S$450mn via a PerpNC5.75 AT1 bond at a yield of 4.05%, 32.5bp inside initial guidance of 4.375% area. The subordinated bonds are rated Baa1/BBB-/BBB+. If the bonds are not called by 16 October 2029, the coupons reset to the prevailing 5Y SORA-OIS benchmark plus 131.65bp. There is no coupon step-up and the notes have a dividend stopper. An early redemption could occur upon the occurrence of change of qualification event or for taxation reasons. A trigger event would occur if (a) the MAS notifies the issuer that it is of the opinion that a write-off or conversion is necessary (b) a non-viability event is determined by the MAS wherein the issuer would require public sector injection of capital or equivalent support. A partial write-off of the notes are allowed. The write-off amount based on the trigger event would either be as per the MAS’s directive, or as the issuer (in accordance with the MAS) determines is required for the trigger event to cease to continue. Proceeds will be used for general corporate purposes. The new bonds were priced at a new issue premium of 14bp over its existing 4.5% Perp callable in February 2029 that yields 3.91%.
YapiKredi raised $650mn via a 10NC5 Tier 2 bond at a yield of 9.25%, ~56.25bp inside initial guidance of 9.75-9.875% area. The subordinated notes are rated Caa2/CCC+ (Moody’s/Fitch). Proceeds will be used for general corporate purposes.
Ecopetrol raised $1.85bn via a 12Y bond at a yield of 8.45%, 30bp inside initial guidance of 8.75% area. The senior unsecured notes are rated Baa3/BB+/BB+. Proceeds will be used to purchase any and all of Ecopetrol’s $1.2bn 4.125% 2025s pursuant to a tender offer and to finance expenditures outside the company’s investment plan.
BOC Aviation raised $500mn via a 5Y bond at a yield of 5.25%, 25bp inside initial guidance of T+150bp area. The senior unsecured bonds are rated A-/A- (S&P/Fitch). Proceeds will be used for capital expenditures, GCP, and/or refinancing of existing borrowings. The issuer of the notes is BOC Aviation USA Corp (BOCAVI) and BOC Aviation is the guarantor.
Piraeus Bank raised €500mn via a 10.25NC5.25 Tier 2 bond at a yield of 7.375%, 37.5bp inside initial guidance of 7.75% area. The subordinated notes are rated B+ (Fitch) and received orders of over €1.8bn, 3.6x issue size. Proceeds will be used for general corporate and financing purposes, including financing its tender offer and to strengthen its capital position.
AXA raised €1bn via a PerpNC10 Restricted Tier 1 (RT1) bond at a yield of 6.375%, 62.5bp inside initial guidance of 7% 7% area. The subordinated notes are rated Baa1/BBB+, and received orders of over €7.9bn, 7.9x issue size. If not called by 16 January 2034, the coupons will reset to the 5Y MS+384.1bp.
UniCredit raised €1bn via a 10.25NC5.25 bond at a yield of 5.4%, 35bp inside initial guidance of MS+315bp area. The bonds are rated Ba1/BB+, and received orders of over €2.2bn, 2.2x issue size.
Restricted Tier 1 (RT1) bonds are junior subordinated securities issued by insurers that qualify as capital under Europe’s insurance regulation (known as Solvency II). To qualify as Tier 1 capital, the bonds must be perpetual with a minimum 10-year non-call, no step-up in coupon and a contractual trigger to principal write-down or equity conversion. According to the Solvency II directive, RT1s will automatically convert into equity or be written down upon three events:
On The Bond Market Rally Overlooking a Soaring $2tn Debt Problem
Padhraic Garvey, head of global debt and rates strategy at ING Financial Markets
“Right now, the market is just obsessed with the Fed rate cycle. Once the novelty of that fades away, we’ll start to worry more about the deficit… It’s difficult to argue that this is inconsequential”
Steven Major, the head of global fixed-income research at HSBC
“It’s wrong to assume if you increase the supply of something, the price has to go down”
On too early to declare victory over inflation or recession – PIMCO
“At this point, we don’t see duration extension as a compelling tactical trade… We expect to be broadly neutral on duration after the most recent bond-market rally, which has brought global yields back in line with our expected ranges, and amid the shifting balance of inflation and growth risks… We see potential for further bouts of long-end curve weakness amid anxiety about elevated supply”
On Growing Demand for Convertible Bonds Likely to Survive Rate Cuts
David Clott, PM at convertible bond specialist Wellesley Asset Management
“The interest cost savings alone are enough to overcome any of the hesitancy from corporates. So, if we see some rate cuts, even 75 basis points, that’s not going to really change the dynamics there…. If we do fall into a harder landing… that would turn the table on the convert market”