The first quarter of 2023 was broadly a cheerful one for bond investors with 75% of dollar bonds in our universe delivering a positive price return (ex-coupon). However, the quarter came with its share of bumps, particularly in March with the collapse of Silicon Valley Bank (SVB), the $17.3bn write-off of Credit Suisse AT1s following its takeover by UBS and overall stress in the banking sector that followed. Within our dollar bond universe, Investment Grade (UG) bonds outperformed High Yield (HY) bonds – 81% of IG dollar bonds ended in the green vs. 63% of HY bonds in the green.
In the interactive violin chart below, we have plotted the quarterly bond price performance of IG and HY dollar bonds by rating category. The Y-axis indicates the 3-month change in bond price (ex-coupon) and the X-axis indicates the rating categories. The width of the violin indicates the number of bonds that fall under the corresponding price returns on the Y-axis. Each point on the violin represents a bond which is an outlier – hovering over it will provide more information on the bond.
The quarter started with a stellar performance in bonds through January owing largely to the fall in benchmark yields. At the time, benchmark yields shifted lower across the board as inflation slowed both in terms of price and wage inflation – CPI slowed to 6.5% from 7.1% and average hourly earnings (AHE) YoY fell to 4.6% from 4.8%. However, bond prices dropped in February on the back of a sharp rise in benchmark yields given a higher-than-expected inflation print and strong jobs report in the US – February CPI came at 6.4%, above expectations of 6.2% and AHE YoY rose to 4.4%, higher than the surveyed 4.3%. While a MoM softening in inflation was seen, the pace of deceleration was slower than what markets expected. This led to markets pricing in a 25bp hike at each of the next three FOMC meetings at the time. However, in March, stress in the banking sector became the major point of concern following the collapse of SVB and the historic write-off of Credit Suisse’s AT1s that shook the broader European AT1 bond market. While this led to 68% of dollar bonds trading lower in March, the quantum of the drop was partly offset by the massive dip in benchmark treasury yields due to the risk-off move.
The US 2Y yield dropped by a massive 79bp during the month and the 10Y yield dropped by over 45bp. The short-end of the curve saw markets price out Fed hikes at any of the Fed’s meetings and started pricing in rate cuts during the remainder of 2023. In contrast, the Fed’s dot plot indicates one more rate hike and then a pause in rates during the remainder of the year.
Looking at the performance of bond indices, all regional indices traded higher in Q1 2023. The LatAm IG space saw the biggest rise, up by 9.8% followed by the US IG and HY indices that were up over 3.5%. The GCC region underperformed, having risen by 1.9%.
The Swiss regulator's decision to write-off Credit Suisse AT1 bonds due to the regulator's decision and its impact on the banking sector, the prices of several banks' AT1 bonds have dropped. Tier 2 bonds on the other hand have broadly escaped the impact given their higher rank vs. AT1s in the capital structure. The move led major central banks including the ECB, BoE and MAS committing to adhere to the capital structure hierarchy in an effort to support risk markets.
In Q1 2023, global corporate dollar bond issuances stood at $718bn, more than double of what was seen in the prior quarter which was at $355bn. In comparison to Q1 2022, issuance volumes were only 4% lower. Issuance volumes were primarily helped by January, which saw the highest monthly issuance since March 2022 with $300bn in new bond deals.
Asia ex-Japan & Middle East G3 issuances in Q1 2023 stood at $92.2bn, ~1.6x that of Q4 2022, and very similar to that of Q1 2022. 80% of the volumes came from IG issuers while HY contributed to 13% of deal volumes.
The largest deals in Q1 2023 was Amgen's jumbo $24bn eight-part deal, the biggest this year from an issuer, followed by Intel’s $11bn jumbo seven-part deal. Markets also saw several large deals from banks including Morgan Stanley’s $6bn three-trancher, Banco Santander raising €5bn via a three-trancher, US Bancorp’s $3.65bn two-trancher and Deutsche Bank’s ~$3.1bn equivalent multi-currency three-trancher. Other large issuances included CVS' $6bn four-trancher and Oracle's $5.25bn four-trancher, besides supras like IBRD and EIB's $5bn issuances each that added to the largest deals.
In the APAC & Middle East region, the largest deal was by the Saudi PIF that raised $5.5bn via a three-trancher, followed by Hong Kong SAR's $4.3bn multi-currency issuance. These were followed by KEXIM and NAB raising $3.5bn via a three-tranche issuance, Philippines' $3bn three-trancher, Greensaif Pipelines' $3bn dual trancher and Indonesia’s $3bn deal. Other notable deals included KDB's $2bn dual-trancher, CICC HK's $1.25bn deal, Sharjah's $1bn issuance, and Temasek's $1.5bn deals.
Top Gainers & Losers
The biggest gainer during the month was Jababeka's 6.5% 2023s that rallied 60% towards par after the Indonesian company launched an exchange offer where majority bondholders consented to swap the bonds for new 2027s whilst also loosening certain covenants in the old bonds. The issuer was subsequently upgraded to CCC+ by Fitch. China South City's dollar bonds also jumped over 20% after the Shenzhen government was said to have held a meeting to discuss facilitating a syndicated loan to China South City. Besides these companies, Russian companies like Sibur and Gazprom also rallied during the quarter.
Among the losers, besides Credit Suisse's perps that were written-off to zero, dollar bonds of Brazilian companies like JSM, B2W, Light SESA dropped over 50% during the quarter. Lumen's bonds fell as much as 40% after their forecast for adjusted EBITDA in 2023 significantly missed estimates. Besides, dollar bonds of sovereigns like Ecuador and Egypt fell over 20% - the former on political risks with fears of impeaching the president; the latter's bonds have been on a downtrend ever since its downgrade by Moody's to B3 in early February. Other losers included Adani Group's dollar bonds that fell on Hindenburg Research's allegations an short position on the group.