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US Treasury yields softened slightly, down 3-6bp. Fed officials including Lorrie Logan, Austan Goolsbee, Christopher Waller continued to emphasize that bringing inflation fully down to the 2% goal is their main focus (scroll down to Talking Heads). They broadly signaled that the cumulative tightening of financial conditions since July, with the 10Y Treasury yield up more than 100bp during this period, could have a dampening effect on the economy. US credit markets saw IG CDS spreads tightening by 1.5bp and HY spreads tightening by 6bp. S&P rose 0.28% and Nasdaq rose 0.9%.
European equity markets closed slightly lower. In credit markets, European main CDS spreads were tighter by 0.3bp and crossover spreads tightened by 2.2bp. Asian equity markets have opened mixed today. Asia ex-Japan IG CDS spreads tightened by 3bp.
BBVA raised $750mn via a 11NC10 Tier 2 bond at a yield of 7.883%, 5bp inside initial guidance of T+335bp area. The bonds have expected ratings of Baa2/BBB/BBB- and the proceeds will be used for general corporate purposes.
Indonesia raised $2bn via a two-tranche deal. It raised:
The senior unsecured bonds have expected ratings of Baa2/BBB/BBB.
Islamic Development Bank raised €550mn via a 5Y sukuk at a yield of 3.456%, unchanged from initial guidance of MS+33bp area. The senior unsecured bonds have expected ratings of Aaa/AAA/AAA, and received orders over €580mn, 1.1x issue size.
Unicredit raised €750mn via a 6.25NC5.25 green senior preferred bond at a yield of 4.629%, 30bp inside initial guidance of MS+180bp area. The senior preferred green bonds have expected ratings of Baa1/BBB/BBB, and received orders over €1.15bn, 1.5x issue size. If not redeemed on 14 February 2029, the coupon resets to 3M Euribor plus 150bps. The new bonds offer a new issue premium of 4.9bp over its existing 0.85% 2031s that yield 4.58%.
Volkswagen Group America raised $2.25bn via a three-tranche deal. It raised:
The senior unsecured bonds have expected ratings of A3/BBB+.
Colombia raised $2.5bn via a two-tranche social bond deal. It raised:
BOC Aviation raised $150mn via a tap of its 5.75% 2028s at a yield of 5.861%, in-line with initial guidance of T+130bp area. The senior unsecured notes are rated A-/A- (S&P/Fitch). Proceeds will be used for capital expenditures, general corporate purposes and to refinance existing debt. The issuer is BOC Aviation USA Corp.
Additional Tier 1 (AT1) bonds are hybrid securities issued by financial institutions to meet their regulatory capital requirements. AT1s typically carry a provision wherein the instruments can be fully or partially written-down or converted to equity if the issuing bank’s capital ratio falls below a certain threshold. This is why AT1s are also known as contingent convertibles (CoCos). The key characteristics of AT1 bonds are: They have a perpetual maturity with a call option They are subordinated in nature, and the first line of debt to incur losses They can be written-down or converted into equity on the occurrence of a “trigger event” Coupons are usually higher as compared to other debt by the issuer, to compensate investors for the higher risk AT1s carry. However, coupons can be discretionary in nature. As part of Credit Suisse’s takeover by UBS, the former’s AT1s worth over $17bn have been written-off, the largest ever in the history of European AT1s.
For more on AT1s: The Complete Guide To AT1 Perpetual Bonds
On watching if financial conditions tight enough – Dallas Fed President Lorie Logan
“looks like we are trending toward 3%… We’re going to continue to need to see tight financial conditions in order to bring inflation to 2% in a timely and sustainable way. I’m going to be looking at the data and I’m going to be looking at financial conditions as we get closer to the following meeting”
On expecting further policy tightening will be needed – Fed Governor Michelle Bowman
“I remain willing to support raising the federal funds rate at a future meeting should the incoming data indicate that progress on inflation has stalled or is insufficient to bring inflation to 2% in a timely way… we continue to assess incoming information and its implications for the outlook”
On Q3 US GDP growth a ‘blowout,’ but newer data suggest slowdown
Fed Governor Christopher Waller
US Q3 GDP was a “blowout” performance and warrants “a very close eye when we think about policy going forward”
Chicago Fed President Austan Goolsbee
Rates, “if … sustained at high levels” most likely represents a tightening of credit for families and businesses… We should expect to see that, with a lag, working its way through the economy. So we’re all paying attention and trying to figure out what the driver is”
On Bond Traders Betting for a Seventh Time on a Fed Shift to Rate Cuts
Deutsche Bank macro strategist Henry Allen
“This is at least the seventh time this cycle that expectations have risen about a dovish central bank pivot… expectations of a pivot can actually make one less likely, since it eases financial conditions that central banks then feel the need to tighten again in order to bring down inflation”