Advanced Theory & Practice of Bonds

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1-2 December 2021

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S&P ended 0.4% higher and Nasdaq was 0.1% higher. Overall, markets were relatively quiet as data was minimal with the US 10Y Treasury yields 2bp tighter at 1.56%. European equities rallied with DAX up 1.3%, CAC up 0.9% and FTSE up 0.5%. US IG CDS spreads were 0.3bp tighter and HY was 1.7bp wider. EU main CDS spreads were 0.6bp tighter and crossover spreads tightened 0.3bp. Asian equity markets are higher 0.5% today and Asia ex-Japan CDS spreads are 6.7bp tighter after China Huarong related risks have reduced post the regulator’s comments (details mentioned below).

webinar

 

New Bond Issues

 

  • Olam tap of S$ 5.375% sub perp non-call 2026 at 5.375% area
  • Putian State-owned Assets Investment $ 3Y bond at 5% area

New Bond Issues 19 Apr

Shandong Marine Group raised $100m via a 3Y bond at a yield of 4.8%, flat to initial price guidance of 4.8% area. SDOE Development I Company is the issuer and Shandong Marine Group is the guarantor. Proceeds will be used to refinance offshore debt and fund working capital requirements. Shandong Marine is a state-owned enterprise involved in maritime transportation, trading and shipping-related services.

 

New Bond Pipeline

  • Malaysia $ 10/30Y sukuk
  • Santos $ Yankee bond
  • TSMC $ Yankee bond
  • China Water Affairs Group $ green bond

  • BOC Aviation $ bond

 

Rating Changes

 

The Week That Was

BEV Weekly Top Half 19 AprBEV Weekly Bottom Half 19 Apr

US primary market issuances rose to $49.7bn, up over 3x vs. $15bn in the week prior. The rise in issuance can be attributed to IG at $37.8bn vs. $16.3bn in the prior week dominated by jumbo deals by banking majors. HY issuances were at $11.5bn, slightly lower vs. $12.94bn in the prior week. The largest deals in the IG space were led by Bank of America’s $15bn six-trancher, which overtook JP Morgan’s $13bn five-trancher to become the largest issuances by a bank ever. In the HY space, United Airlines led the table raising $4bn via a dual-trancher. In North America, there were a total of 64 upgrades and 36 downgrades combined, across the three major rating agencies last week. LatAm saw only $1.1bn in deals last week vs. $3.26bn in the week prior with Investment Energy Resources and Banco GNB raising $700mn and $400mn respectively. EU Corporate G3 issuance saw a slight decrease last week to $24.2bn vs. $29bn in the week prior – Altice France raised $2.09bn followed by BNP Paribas’ $1.89bn issuances. Across the European region, there were 30 upgrades and 17 downgrades across the three major rating agencies. GCC and Sukuk G3 issuances were again meagre at only $660mn. Across the Africa/Middle East region, there were 3 upgrades and 2 downgrades across the three major rating agencies. APAC ex-Japan G3 issuances increased to $10.8bn vs. $2.4bn in the prior week led by Tencent’s $4.15bn four-trancher followed by CK Hutchinson’s $2bn three-trancher and CCB Hong Kong branch’s $1.1bn two-part deal. In the Asia ex-Japan region, there were 12 upgrades and 28 downgrades combined, across the three major rating agencies last week.

Term of the Day

144A Bonds

144A bonds refer to privately placed debt instruments that can be traded among qualified institutional buyers (QIBs) and with a shorter holding period of six months. These bonds get their name from Rule 144A, which exempts the securities from SEC registration that typically requires extensive documentation and a two-year holding period. 144A bonds can be issued with a lesser amount of documentation as the underlying assumption is that QIBs are sophisticated investors who do not need the same level of information and protection as individual investors. The SEC defines a QIB as institutional investors that have at least $100mn in assets under management.
Australian energy company Santos has mandated banks for a 144A offering of a 10Y Yankee 144A bond.

Talking Heads

Chris Ahrens, a strategist at Stifel Nicolaus & Co
“Lower yields, or even just no further pickup, seems to be the pain trade now,” said Ahrens. “A lot of financial institutions are very flush with cash and had been holding on and hoping for higher yields — cheaper prices — to come back into the Treasury market. Now they are being forced to buy Treasuries at higher prices.”
Tom Essaye, former Merrill Lynch trader who founded “The Sevens Report” newsletter
“The market is ignoring really good economic data now, so the thing that is going to get yields moving higher again is either a surprise pop in inflation or a bit of a hawkish turn in tone from the Fed,” he said. “I don’t see either of those things happening in the very short-term. Longer-term, I still think yields are headed higher — but we are in this weird position now where the Fed has essentially said they aren’t changing their opinion of things no matter what the data is.”

On emerging market bulls bracing for Treasury relapse after rally – according to Zach Pandl and Kamakshya Trivedi, Goldman Sachs strategists and their team

“Some profit taking on rallies and re-engagement on market wobbles makes sense, even as we keep the faith on cyclical upside over the longer term,” the strategists wrote. “The idiosyncratic risks that have weighed on EM FX in 2021 are likely to continue to generate volatility and create opportunities.”

Adrian Miller, chief market strategist at Concise Capital

“Default rates have fallen a lot and companies have refinanced their debt at lower rates and if we get the expected rebound in profits, high yield can hold up into next year,” says Miller.
Tracy Chen, portfolio manager at Brandywine Global
“Business models will change after Covid and there are still a lot of companies being supported by accommodative policies.” “Stimulus and infrastructure spending is good for certain sectors. Longer term we are less bullish on high yield.” “Prior to Covid, investors were very cautious about credit and talking about the end of the cycle,” says Chen. “There is a case that a bigger default cycle has been delayed and that it occurs over the next 12 to 18 months, once the stimulus measures have ended.”
Drew Matus, chief market strategist at MetLife Investment Management
“Whatever the price tag is, it would be more if we didn’t do anything right away,” said Matus.
Jamie Rush, chief European economist for Bloomberg Economics
“Massive stimulus—financed by massive borrowing—is the best, indeed the only possible response to the Covid-19 recession,” said Rush. “Extremely low interest rates mean the immediate cost is basically zero. That doesn’t mean stimulus is free. Government and corporate balance sheets are now significantly more exposed to the risk of rising rates.”
“Overall, this development highlights the need for China to improve transparency regarding its foreign exchange intervention activities,” the Treasury Department wrote. “Compared to other major economies, especially in Asia, China is increasingly an outlier with respect to its non-disclosure of foreign exchange market intervention.”

Top Gainers & Losers – 19-Apr-21*

BondEvalue Gainer Losers 19 Apr
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