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US Treasury yields continued its recent uptick across the curve, with the 2Y and 10Y yields up 6bp each on Tuesday. Fed Chairman Jerome Powell dented expectations of immediate rate cuts saying that the “recent data have clearly not given us greater confidence and instead indicated that it’s likely to take longer than expected to achieve that confidence”. If price pressures persist, he said the Fed can keep rates steady for “as long as needed”. As per CME probabilities, markets are pricing-in two 25bp rate cuts this year with the first expected in July with a 57% probability and the next one in December with a 52% probability. US IG CDS spreads widened 0.5bp and HY spreads widened 4bp. The S&P and Nasdaq fell by 0.1-0.2%.es
European equity indices ended lower. European IG CDS spreads widened 1.9bp and crossover spreads were 6.5bp wider. Asian equity markets have opened broadly lower today, following global bourses. Asia ex-Japan IG CDS spreads were 4.1bp wider. China reported faster-than-expected economic growth in Q1. Q1 GDP was at RMB 29.6tn ($4tn) – an increase of 5.3% vs. 5.2% in the previous quarter. Retail Sales growth in March slowed to 3.1% YoY, down from 5.5% in the first two months of 2024. Industrial Production rose 4.5%, down from 7% in January-February.
KEB Hana Bank raised $600mn via a two-part sustainability bond deal. It raised $300mn via a 3Y bond at a yield of 5.509%, 30bp inside initial guidance of T+100bp area. It raised $300mn via a 5Y bond at a yield of 5.453%, 22bp inside initial guidance of T+110bp area. The senior unsecured notes are rated Aa3/A+. Net proceeds will be used to finance and/or refinance new and/or existing projects from combination of eligible green categories and eligible social categories in accordance with its sustainability financing. The new 3Y bonds are priced at a new issue premium of 9bp over its existing 3.25% 2027s that currently yield 5.42%.
Preference shares are a type of security issued by corporates that has features of both bonds and common stock. In terms of capital structure, preference shares pay dividends and have seniority over common stock but are subordinated to bonds. They do not have voting rights unlike common equity and pay dividends out of each year’s net profits. There are various types of preference shares – non-cumulative, redeemable/irredeemable, convertible, participating etc. In the case of cumulative preference shares, the company can pay cumulative dividends in the following year if the particular year’s profits are not enough. Preference shares may differ from AT1s. For example, they are based on the income statement while AT1s are balance sheet based. For instance, a bank making a loss after tax in a year may be able to pay interest on AT1s if capital levels are satisfactory but not dividends on preference shares. Alternatively, a bank making some profits could pay preferred dividends but may not be able to pay up on AT1s if capital levels are unsatisfactory and thus may get triggered. Differences of preference shares as against perpetual bonds, may include characteristics like step-ups etc. besides capital structure seniority of the latter.
Goldman Sachs raised $2.25bn via a PerpNC5 Series K preference share at a yield of 7.5%.
On IMF warning of financial risks lingering amid ‘soft landing’
“Confidence in a soft landing for the global economy is growing. However, global inflation remaining persistently above those targets could challenge this narrative and may trigger instability.”
Fabio Natalucci, deputy director of the IMF’s Monetary and Capital Markets Department
“The primary risk there is the extent to which central banks, particularly in the U.S. … may in fact not end up delivering the cuts”
On IMF Changing Rules to Speed Debt Revamps, Avoid China Delays
Martin Muhleisen, a former director at the IMF’s key strategy
“The idea is that in the future the IMF can lend earlier once a country’s creditors have agreed to negotiations over the restructuring of official debt”
On Foreign Investors Favoring US High-Grade Debt – JPMorgan
“With the increase in yields for the second week in a row, US corporate bonds have turned more attractive versus European corporate bonds for all tenor points and all currencies”