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US 2Y and 5Y Treasury yields dropped by over 15bp and the 10Y by 10bp as inflation data came in much softer than expected. US CPI came at 3% for June 2023, below expectations of 3.1% and lower than last month’s 4% print. Similarly, Core CPI came at 4.8%, below the surveyed 5.0% and lower than last month’s 5.3% print. The drop in the inflation reading strengthened the case for only a single rate hike by the Fed in July (currently expected with a 92% probability) and no more hikes beyond that for the rest of 2023. The soft inflation print saw the peak Fed Funds rate drop 6bp to 5.38%. The data further boosted risk assets as US equity indices jumped higher with the S&P and Nasdaq up 0.7% and .2% respectively. Similarly, credit spreads tightened with US IG and HY CDS spreads tighter by 2.4bp and 14bp respectively.
European equity indices closed higher too with European main CDS spreads 3bp tighter and Crossover CDS tighter by 12.9bp. Asia ex-Japan CDS spreads also tightened by 4.3bp and Asian equity markets have opened broadly higher today.
Abu Dhabi Islamic Bank (ADIB) raised $750mn via a PerpNC5.5 AT1 sukuk at a yield of 7.25%, a solid 62.5bp inside initial guidance of 7.875% area. The junior subordinated bonds are unrated and received orders of more than 9x its issue size. The issuer however is rated A2/A+. If the bonds are not called on the first call date (January 2029), the coupon will reset at the USD 5Y swap rate plus a spread of 305.9bps. The coupon will reset every 5 years thereafter if the perp is left uncalled. The junior subordinated bonds are unrated. Proceeds will be used to enhance ADIB’s tier 1 capital as well as for general corporate purposes. Looking at GCC issuers with similar issuer ratings, the new Perp was priced 56bp tighter to Emirates NBD’s 4.25% Perp callable in February 2027 that yielded 7.85% at the time of pricing, with a coupon reset at the US 6Y Swap+315.5bp. Emirates NBD is also rated at A2/A+. However, ADIB’s Perp was priced roughly in-line with Mashreq’s 8.5% Perp that yielded 4.27% at the time of pricing, with a coupon reset at the US 5Y Treasury+544.8bp. Mashreq is rated Baa1/A/A.
Telecom Italia raised €750mn via a 5Y bond at a yield of 7.875%, 37.5bp inside initial guidance of 8.25% area. The senior unsecured bonds have expected ratings of B1/B+/BB-. Proceeds will be used for general corporate purposes including to refinance short-term debt. The new bonds offer a new issue premium of 57.5bp over its existing 6.875% 2028s that yield 7.3%
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Hanhwa Q Cells hires for $ 5Y green bond
Shinhan Financial hires for $ 5Y social bond
A private placement is a sale of securities directly to select private investors, rather than issuing them via a public offering. Investors in privately placed bonds generally comprise large banks, mutual funds, or insurance companies. The advantage of private placements is that they may not be subject to the same strict regulations regarding disclosure and reporting of public offerings. Also, the cost and time savings add to its attractiveness. On the other hand, they may carry a higher rate to entice investors and they limit the number and variety of investors that can take part unlike public offerings. Unlike bonds issued via public offerings, privately placed bonds may not trade on the secondary market.
On ECB Rate Hikes Affecting Euro-Zone Growth – Portugal finance minister Fernando Medina
“Inflation is already on a downward trend following an unprecedented bout of monetary tightening by the ECB…Meanwhile, the effects of rate hikes to date haven’t yet been fully absorbed by households and companies…The risks that further increases could create a more difficult situation for growth at the European level are now higher and should be looked at very carefully.”
“I think that you have this risk-reward dynamic right now in the stock market, and it is unappealing…we do see better opportunities in high-quality bonds right now rather than stocks and that has been our main message for investors. If you look at the 2-year Treasury for example, it is yielding 4.7% and it reached 5% last week and that is a very attractive yield.”
On Factors Affecting China’s Future Economic Growth – researchers at Rhodium Group
“The most important variables impacting China’s economic growth over the next two years will be the success or failure of local government debt restructuring, and Beijing’s approach to the role of local government investment within China’s economy in the future…A collapse in local government investment would be comparable to economic impact of the crisis in the property market.”
On Pimco Looking Into Invest in Alternative Assets
Jamie Weinstein, managing director and portfolio manager at Pimco
“As long as rates remain elevated from where deals were underwritten there’s going to be an increasing strain for some…borrowers and structures…We’ve added resources and headcount in the last six months to the alternatives business overall…And particularly within corporate direct lending and asset-based lending, where we’re slowly scaling up our private strategies businesses.”
Charles Graham, senior analyst at Bloomberg Intelligence
“Pimco needs to find assets which need active fund management and offer higher margins…That’s the attraction of building a private-credit platform.”
Eric Jacobson, fixed income director at Morningstar
“(Pimco’s CIO Dan Ivascyn) stepped in when the assets were ultra-cheap and capitalized on wider fear still plaguing the market. It could be a similar game they play this time around with their alternatives business.”