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US Treasury yields were flat on Wednesday despite Fed Chair Jerome Powell’s hawkish congressional testimony. He said that the Fed had “a long way to go” to bringing inflation down to its 2% target and that he anticipates further rate increases, echoing comments from Fed nominees a day earlier. Markets continue to price in a 25bp hike in July and expect them to stay at that level till the end of the year, as per CME probabilities. The peak Fed Funds rate was unchanged at 5.31%. US equity indices saw its third consecutive day in the red with the S&P and Nasdaq down 0.5% and 1.2% respectively. US IG and HY CDS spreads widened 1.1bp and 8.3bp respectively.
UBS in a note said that this is an opportune time for locking in attractive yields in quality fixed income including IG bonds. They however mentioned that being selective is key. They prefer selective exposure to BB/BBB rated companies at the shorter end of the curve across both senior and subordinated bonds. On the longer end of the curve, they prefer bonds that would gain the most from falling rates. In this space, the sectors to look out for include utilities, telecoms, and other non-cyclicals. Bank bonds are also on the watchlist given its recent underperformance, they noted. UBS added that “fallen angels“ (Term of the Day, explained below), expensive cyclicals and industries highly exposed to rising input costs should be avoided.
European equity indices closed lower with European main and Crossover CDS spreads wider by 0.9bp and 4.8bp. Asia ex-Japan CDS spreads widened by 0.9bp. Asian equity markets have opened in the red this morning.
Hyundai Capital America raised $3bn via a four-tranche deal as seen in the table below.
Proceeds from the 2Y Green notes will be used to (re)finance eligible projects, including loans and financial services for customers and dealers for purchasing, leasing and trading of zero-emission vehicles, financing and operation of programs that increase consumer access to zero-emissions vehicles, as well as vehicle charging infrastructure projects. Proceeds from the three conventional notes will be used for general corporate purposes. All notes have expected ratings of Baa1/BBB+, in line with the issuer’s rating. Despite the tenor premium offered between the 3Y, 5Y and 7Y tranches, the inverted Treasury yield curve resulted in final pricing of the conventional notes being close to each other at ~5.73-5.74%.
A fallen angel is a company or sovereign whose credit rating has been cut from investment grade to junk due to deteriorating financial conditions of the company. The downgrade to junk may have a negative impact on its bond prices as asset managers that are mandated to hold only investment grade debt may be forced to sell off their holdings in the fallen angels.
Country Garden is an example of a fallen angel after its rating fell from investment grade to high yield by both Moody’s and S&P at Ba1 and BB+ respectively last year.
On ECB’s Stance on Inflation and Interest Rates
Joachim Nagel, Bundesbank President
“Inflation to me is like a greedy beast and we do have to fight against this very greedy beast…As inflation fighters we have to be very stubborn because inflation is so stubborn… It would be a first order error to give up too early.”
Francois Villeroy de Galhau, Governor of the Bank of France
“What matters is how long we remain at the terminal rate rather than its level.”
Isabel Schnabel, head of market operations at ECB
“The labour market is so incredibly strong… there is a risk that this could turn into such a wage price spiral…we have to be very attentive and have to monitor this very carefully.”
Jerome Powell, Fed Chairman
“We didn’t use the word pause and I wouldn’t use it here today… (the outlook for two more rate hikes by the end of the year) is a pretty good guess of what will happen if the economy performs about as expected…inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go.”
Austan Goolsbee, Chicago Fed President
The central bank is in a “wait and see” mode as further data come in.
Raphael Bostic, Atlanta Fed President
“If we simply press on with additional rate hikes, we could needlessly drain too much momentum from the economy.”
On Potential Opportunities for Investors – KKR chief macro strategist Henry McVey
“Money managers should take advantage of volatility stemming from the recent failure of several US banks and slowdown in public debt markets by moving into riskier assets…High-quality liquid credit, real estate credit and preferred and convertible securities are also attractive, and investors should boost their cash holdings to move quickly as opportunities arise…The macro headlines right now are as daunting as any time I’ve seen in the past 31 years doing this business…At the same time, there are some really interesting things you can do as an investor and make attractive returns without taking a lot of risk.”
On Colombia’s Interest Rates – Colombian Finance Minister Ricardo Bonilla
“We expect that interest rates will stay unchanged this month, and we’ll monitor for the next two or three months until September, when we’ll analyze whether interest rates can start to come down.”
On the Tech Stocks Rally – Wells Fargo head of equity strategy Chris Harvey
“The number one issue is: tech is not going to roll over, the major theme isn’t going to roll over until you crack the economy…And I don’t think you can crack the economy until the Fed gets more aggressive. So we’ll have some wiggles, I think we’ll have a pullback in the market, we’ll have a pullback in big tech, but that overall theme is still in place and not until the economy breaks do we really think about that trend breaking…So really, you need some sort of shock to get us into a recession.”