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US Treasury yields rose by 6bp across the curve on Tuesday. Federal Reserve Governor Christopher Waller indicated that there was no need to “do anything imminent anytime soon” signaling he supports holding rates steady at the next meeting on September 20. US IG CDS spreads were 1bp wider and HY spreads widened 8.8bp. Equity markets were slightly weaker with the S&P down 0.4% and the NASDAQ down 0.4%.
European equity markets were marginally lower on Tuesday. In credit markets, European main CDS spreads were wider by 0.4bp with crossover spreads widening 1.9bp. Asian equity markets have opened mixed this morning while Asia ex-Japan CDS spreads tightened by 4.1bp yesterday. The Japanese Yen set a fresh 10-month low against the dollar overnight, to 147.8. Masato Kanda, vice finance minister for international affairs said, “If these moves continue, the government will deal with them appropriately without ruling out any options”. The yen edged higher after the remarks. China’s Caixin/S&P services PMI dropped to 51.8 in August from 54.1 in July, the lowest reading since December. It was a busy day at the primary markets with new deals from popular issuers including UBS, DBS, Volkwagen and ING.
UBS raised $3bn via a three-part deal. It raised:
The bonds are rated Aa3/A+/A+. Proceeds will be used for general corporate purposes.
DBS raised $1.5bn in a two-part deal. It raised $750mn via a 2Y bond at a yield of 5.479%, 27bp inside initial guidance of T+80bp. It also raised $750mn via a 2Y FRN bond at a yield of 5.955%. The floating coupon will reset at the overnight SOFR plus a spread of 61bp and will be paid quarterly. The senior unsecured bonds have expected ratings of Aa2/AA- (Moody’s/Fitch), and received combined orders over $4.65bn, 3.1x issue size. The fixed tranche attracted orders over $2.65bn. The US made up 45%, Asia 43% and EMEA 12%. Asset and fund managers snapped up 50%, banks 16%, central banks, sovereign wealth funds and agencies 16%, insurance, pension funds and corporates 12%, and private banks, securities and others 6%. The FRN tranche reeled in more than $2bn of orders. The US accounted for 53%, Asia 45% and EMEA 2%. Asset and fund managers took 61%, banks 35% and other financial institutions taking the remaining 4%. Proceeds will be used for finance and treasury activities of the issuer, including the provision of intercompany loans (or other forms of financing) to DBS and its subsidiaries.
Volkswagen raised $3.4bn via a five-part deal:
The senior unsecured bonds have expected ratings of A3/BBB+. Proceeds will be used for general corporate purposes. The new 2Y fixed rate notes are priced 3.4bp tighter than its existing 3.95% 2025s. The new 3Ys however offer a new issue premium of 7.6bp over its existing 3.2% 2026s that yield 5.64%, while the new 5Ys offer a new issue premium of 4.8bp over its existing 4.75% 2028s that yield 5.63%.
ING Groep raised $3bn via a three-part deal. It raised:
Austrian lender Erste Group raised €500mn via a PerpNC5.6 AT1 bond at a yield of 8.676%, ~7bp inside initial guidance of 8.75% area. The bonds are rated BBB- by S&P. If not called by April 2029, the coupons will reset then and every five years thereafter to the Euro 5Y Swap rate plus a spread of 546.3bp. The issuer also offered to buyback €500mn of its existing perps while launching a buyback offer.
Turkey’s Vakifbank raised $750 via a 5Y sustainability bond at a yield of 9.125%, ~44bp inside initial guidance of 9.500-9.625% area. The bonds are rated B- by Fitch. Proceeds will be used for eligible projects under VakifBank’s Sustainable Finance Framework.
CBA raised $3.25bn via a three-tranche deal. It raised:
The 2Y fixed and floating rate senior unsecured notes have expected ratings of Aa3/AA-/A+. The covered bond is unrated but guaranteed by Perpetual Corporate Trust Ltd. Proceeds will be used for general corporate purposes.
SMFG raised $2bn via a two-part TLAC deal. It raised $1.1bn via a 5Y bond at a yield of 5.716%, 30bp inside initial guidance of T+165bp area. It also raised $900mn via a 10Y bond at a yield of 5.808%, 30bp inside initial guidance of T+185bp area. The senior unsecured bonds have expected ratings of A1/A-. The new 5Y notes are priced 1.4bp tighter to its existing 5.52% 2028s that yield 5.73%.The new 10Y notes offer a new issue premium of 4.8bp over its existing 5.766% 2033s that yield 5.76%. Proceeds will be used to extend unsecured loans, intended to qualify as internal TLAC, to Sumitomo Mitsui Banking Corp, which in turn intends to use the borrowed funds for general corporate purposes.
AIA raised S$550mn via a PerpNC5.5 Tier 2 bond at a yield of 5.1%, 25bp inside initial guidance of 5.35% area. The subordinated notes have expected ratings of A2 by Moody’s. If uncalled on the first call date (12 March 2029), the bonds will reset then and every 5 years thereafter at the SGD 5Y OIS rate plus a spread of 186.5bp. The bonds have a dividend stopper, a dividend pusher and an optional deferral clause for its coupons which can be exercised at the discretion of the issuer. Proceeds will be used for general corporate purposes. The new Perp priced 38bp tighter vs. its older similar-rated 2.9% Perps callable in 2031 that are currently yielding 5.48% to call.
ADCB raised $650mn via a Long 5Y Green bond at a yield of 5.616%, 25bp inside initial guidance of T+150bp area. The senior unsecured bonds have expected ratings of A/A+ (S&P/Fitch), and received orders over $1.9bn, 2.9x issue size. Proceeds will be used to finance/refinance eligible green assets that fulfil the eligibility criteria set out in the Issuer’s green bond framework.
Covered bonds are senior secured debt instruments that are typically issued by banks. These bonds are secured (i.e. covered) by a pool of assets referred to as the “cover pool”, which typically consists of mortgages or loans. In an event that the bank defaults, holders of covered bonds have a preferential claim to the cover pool, which ensures interest payments and repayment of principal. This makes covered bonds relatively more secure vs. other debt and therefore results in a higher credit rating. While they have similarities with Mortgage-Backed Securities (MBS) in terms of the pool of assets there is a difference – the transfer of mortgages to an Special Purpose Entity (SPE) in a MBS issue means that the issuing bank no longer bears the risk of the loans and the mortgage pool is static. This is in contrast to Covered Bonds where, because the mortgage pool is constantly adjusted to maintain the pool size, the issuing bank bears the credit risk of the mortgages.
On Vanguard Seeing EM High Grade Debt as ‘Rainy Day’ Bet Amid US Risk
Nick Eisinger, co-head of EM active fixed-income at Vanguard
“In a situation where a US recession takes hold, it is likely that the market will anticipate rate cuts by the Federal Reserve, which will mean that core rates rally, and by association some of the higher quality Treasury sensitive names also”… Investment grade sovereigns like Poland or Saudi Arabia would be resilient in this scenario.
On recent data giving Fed space to decide next interest rate move – Fed Governor, Christopher Waller
Recent economic news is “going to allow us to proceed carefully… there’s nothing that is saying we need to do anything imminent anytime soon, so we can just sit there, wait for the data, see if things continue… want to be very careful about saying we’ve kind of done the job”… want to see a couple of months continuing along this trajectory before I say we’re done doing anything.”
On Wall Street Rethinking Turkish Rate Path as Inflation Approaches 70%
Fatih Akcelik, the JPMorgan’s Turkey economist
CBRT “is more sensitive to the inflation outlook with new MPC members
Zumrut Imamoglu, a BofA analyst
“Given that inflation expectations are much higher now than back in June, more is needed. The main question is, can it be delivered ahead of local elections in March”