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US Treasury yields pulled back on Tuesday after a surge in long-end yields to begin the week. The 2Y Treasury yield fell 9bp to 5.06% while the 10Y yield fell 5bp to 4.52%. US consumer confidence dropped to a 4-month low, weighed down by persistent worries about higher prices and rising recessionary fears. The index declined to 103 this month, below estimates of 105.5. Minneapolis Fed President Neel Kashkari, a voting FOMC member said he expects that one more rate hike would be needed, even with soft landing backdrop. In credit markets, US IG CDS spreads were 1.3bp wider while HY spreads widened by 9.5bp. The S&P and Nasdaq dropped by 1.5-1.6% on Tuesday. The CBOE Volatility Index or VIX hit its highest levels since late May touching the 19.5 mark.
European equity markets ended lower. In credit markets, European main CDS spreads were wider by 2.5bp and crossover spreads widened 12bp. Asian equity markets have opened mixed this morning. Asia ex-Japan CDS spreads widened 2.3bp.
First Abu Dhabi Bank raised $1bn via a 10.5NC5.5 Tier 2 bond at a yield of 6.32%, 30bp inside initial guidance of T+200bp area. If uncalled in 2028, the coupon will reset at the US 5Y Treasury plus a spread of 170bps. The bonds have expected ratings of A (Fitch), and received orders over $2.8bn, 2.8x issue size.
Transocean raised $325mn via a 5Y First Lien senior secured bond at a yield of 8%, 25bp inside initial guidance of 8.25% area. The bonds have expected ratings of B2 (Moody’s). Proceeds will be used to partially finance Deepwater Aquila project and to fund the initial debt service reserve.
Rabobank raised $1bn via a two-part senior preferred deal. It raised $700mn via a 3Y bond at a yield of 5.604%, 18bp inside initial guidance of T+95bp area. It also raised $300mn via a 3Y FRN bond at a yield of 6.245%. The floating coupon will reset at the overnight SOFR plus a spread of 90bps and will be paid quarterly. The bonds have expected ratings of Aa2/A+/AA-. Proceeds will be used for general corporate purposes.
Citibank NA raised $5bn via a three-tranche deal. It raised
The senior unsecured bonds have expected ratings of Aa3/A+/A+. Proceeds will be used for general corporate purposes. This is Citi’s first bond issuance at bank-level since 2019.
Islamic Development Bank raised $1.75bn via a 5Y sukuk at a yield of 4.906%, 5bp inside initial guidance of SOFR MS+57bp area. The senior unsecured bonds have expected ratings of Aaa/AAA/AAA, and received orders over $1.9bn, 1.1x issue size. The new bonds are priced 9.4bp tighter to its existing 4.598% 2028s that yield 5%.
Restricted Tier 1 (RT1) bonds are junior subordinated securities issued by insurers that qualify as capital under Europe’s insurance regulation (known as Solvency II). To qualify as Tier 1 capital, the bonds must be perpetual with a minimum 10-year non-call, no step-up in coupon and a contractual trigger to principal write-down or equity conversion. According to the Solvency II directive, RT1s will automatically convert into equity or be written down upon three events:
On US Dollar Emerging as Best Haven From American Government Shutdown Fears
Andrew Ticehurst, rates strategist at Nomura
“The US dollar is a high yielding, high growth, safe haven — an unusual and powerful combination… We expect USD strength to continue, driven by growth divergences, higher rates and potential further risk-off moves ahead”.
On Bond Traders Roiled by Fed Seeing US Shutdown as Next Wild Card
Jean Boivin, head of BlackRock Investment Institute
“Investors will definitely see this as a near-term market event risk that creates volatility… the risk on the fiscal side could worry investors and over time there is more term premium”
Michael Pond, the head of global inflation-linked research at Barclays
“We could have a government shutdown and that will likely lead to some heightened uncertainty”
TD Securities analysts
“Overall, we view the shutdown as one of the many headwinds the economy faces this fall”
On another rate hike, then a hold – Minneapolis Fed President, Neel Kashkari
“If the economy is fundamentally much stronger than we realized, on the margin, that would tell me rates probably have to go a little bit higher, and then be held higher for longer to cool things off”