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US Treasury yields dropped by over 10bp across the curve. The US Treasury concluded the auction of 2Y and 5Y notes. The $54bn 2Y auction was met with soft demand with a bid-to-cover of 2.54x, down from 2.64x in October and a tail of 1.1bp. The $55bn 5Y auction on the other hand saw strong demand with a bid-to-cover of 2.46x, up from 2.36x in October and a stop through of 0.5bp. Primary dealers took 16.85% of the issue. US credit markets saw IG CDS spreads widen 0.7bp and HY widening 4.1bp. Equity markets were slightly lower with the S&P ad Nasdaq down 0.1-0.2%.
European equity markets were slightly higher. In credit markets, European main CDS spreads were wider by 1.6bp and crossover spreads widened by 7.6bp. Asian equity markets have opened slightly lower today. Asia ex-Japan IG CDS spreads were wider by 0.8bp.
Citibank NA raised $2.5bn via a two-tranche deal. It raised $2bn via a 3Y bond at a yield of 5.488%, 17.5bp inside initial guidance of T+105bp area. The fixed rate bonds have a make-whole call. It also raised $500mn via a 3Y FRN bond at a yield of 6.415%. The floating coupons will reset at the overnight SOFR plus a spread of 106bps and will be paid quarterly. The senior unsecured bonds have expected ratings of Aa3/A+/A+. Proceeds will be used for general corporate purposes.
Suzhou SND raised $330mn via a 3Y sustainability bond at a yield of 5.95%, 40bp inside initial guidance of 6.35% area. The senior unsecured bonds have expected ratings of BBB+ (Fitch) and also have a change of control put at 101. Proceeds will be used to refinance existing debt and working capital in accordance with the group’s sustainable finance framework.
A Make Whole Call (MWC) is a type of call option on a bond that gives the issuer the right to redeem a bond before its maturity date by compensating (making whole) bondholders for future coupon payments. MWC provisions were introduced in the 1990s and are rarely exercised by issuers. If exercised, the issuer has to pay a lump sum amount to the bondholders that represent the net present value of future foregone coupon payments, typically stated as a formula in the bond prospectus.
MWCs are different from traditional call options in that investors are compensated for foregoing future coupon payments. With traditional call options, the issuer can exercise the call option at the predefined call price without having to pay bondholders for foregoing future coupons. This makes MWCs beneficial to bondholders as compared to traditional call options and are typically expensive for the issuer to exercise.
On Bond Market Recovery Seen as Opening Act for Broad Revival
Ashish Shah, CIO of Public Investing at Goldman Sachs Asset Management
“I don’t think the Fed is going to be fast to pivot… That’s because you are seeing inflation coming down as well as a deceleration of growth… (2024) is going to be the year of bonds, with them performing well. You’ll also see a steepening of the yield curve”
Brian Smedley, CIO at Cynosure Group
“The Fed is likely to be saying, ‘Don’t get too excited about rates cuts’ for now. That’s the game they will likely play for a while.”
“The amplitude of the November move across all risk classes has been extremely strong, so I would expect some volatility… The main risk to emerging markets is, paradoxically, a continued strengthening in US economic growth, which could cause the Fed to resume hiking policy rates”
On says getting inflation to 2% will be ‘hard work’ – BoE’s Andrew Bailey
“Policy is operating in what I call a restrictive way at the moment – it is restricting the economy. The second half, from there to two, is hard work and obviously we don’t want to see any more damage… But we do have to get (inflation) down to 2% and that’s why I have pushed back of late against assumptions that we’re talking about cutting interest rates or we will be cutting interest in anything like the foreseeable future”
On China’s Property Stimulus Creating Iron Ore Price Conundrum
Marcus Garvey, head of commodities strategy at Macquarie Bank
“When they’re doing something that fights the fundamentals, they can slow the basis of price appreciation and cause pullbacks. But they don’t deliver a sustained change in the trend”
Tomas Gutierrez, analyst at Kallanish Commodities
“Basically, sentiment for iron ore next year has turned. This isn’t fully supported by current fundamentals, as demand now is weak. But we expect 2024 demand to be up from this year”