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US Treasury yields resumed their surge with long-end yields leading the curve to bear steepen – US 10Y yields rose 10bp to 4.56%, a level last seen in 2007 while the 2Y yield rose 3 bp to 5.15%. The 2s10s curve has now steepened to -58bp, levels last seen in May post which the curve inverted further to lows of -109bp. Analysts note that the sell-off in Treasuries is said to come on the back of multiple factors including a ‘higher for longer’ theme on interest rates alongside an increase in supply of treasuries through the quarter as the US Treasury Department is targeting an increase in cash balances to $750bn at year-end. Separately, the Republican-controlled House of Representatives is expected to advance steep spending cuts this week. However, this is unlikely to be passed due to lack of sufficient support and could lead to a partial shutdown of the US government by next Sunday. In credit markets, US IG CDS spreads were 0.5bp wider while HY spreads widened by 1.3bp. The S&P and Nasdaq rose by 0.4-0.5% on Monday.
European equity markets ended lower. In credit markets, European main CDS spreads were wider by 0.9bp and crossover spreads widened 4.9bp. Asian equity markets have opened weaker again this morning. Asia ex-Japan CDS spreads widened 1.8bp.
Credit Agricole raised $1.75bn via a 6NC5 senior non-preferred bond at a yield of 6.316%, 30bp inside initial guidance of T+200bp area. If uncalled, the coupon will reset at the overnight SOFR plus a spread of 186bps. The bonds have expected ratings of A3/A-/A+. Proceeds will be used for general funding purposes.
ING Groep raised €1.75bn via a two-part deal. It raised €1bn via a 3Y bond at a yield of 4.16%, 27bp inside initial guidance of MS+85bp area. It also raised €750mn via a 3Y FRN at a yield of 4.618%. The floating coupons will reset at the 3M EURIBOR plus a spread of 66bps and will be paid quarterly. The senior unsecured bonds have expected ratings of A1/A+/AA-. The 3Y fixed tranche received orders over €2.1bn, 2.1x issue size while the 3Y floating tranche received orders over €1.3bn, 1.7x issue size.
ANZ raised $1.65bn via a two-tranche deal. It raised $1bn via a 2Y bond at a yield of 5.671%, 20bp inside initial guidance of T+75bp area. It also raised $650mn via a 2Y FRN bond at a yield of 5.975%. The new fixed rate bonds offer a new issue premium of 11.1bp over its existing 5.375% 2025s that yield 5.56%. The floating coupons will reset at the overnight SOFR plus a spread of 64bps and will be paid quarterly. The senior unsecured bonds have expected ratings of Aa3/AA-/A+. Proceeds will be used for general corporate purposes.
Korea Land & Housing Corp raised $700mn via a 2Y social bond at a yield of 5.877%, 30bp inside initial guidance of T+105bp area. The senior unsecured bonds have expected ratings of Aa2/AA (Moody’s/S&P), and received orders over $2.3bn, 3.3x issue size. Asset and fund managers took 51% of the deal, banks 29% and other financial institutions made up the remaining 20%. APAC investors were allocated 64%, and the rest were taken by EMEA. Proceeds will be used to finance/refinance social projects in accordance with the Issuer’s Social, Green and Sustainability Bond Framework.
Risk parity refers to an asset allocation strategy wherein the allocation or weight to each asset class is defined based on the risk each of them contribute to the overall portfolio, rather than the return. Let’s take the example of a 60:40 portfolio, where 60% of the allocation to equities contributes 90% of the risk of the portfolio given that they are historically around 3x more volatile compared to fixed income securities. Given the concentration into equities, the portfolio return is dictated by the performance of equities. Risk parity avoids this concentration risk, by constructing more balanced and diverse risk-based portfolios. Under this strategy, a 60:40 portfolio would entail an allocation to equities such that it contributes 60% to the overall portfolio risk and thereby the weightage would typically be lower than 60% given the higher risk inherent to equities. It build out of Modern Portfolio Theory (MPT) that promotes portfolio construction that maximize expected returns given a level of risk. However as compared to MPT, risk parity allows for short selling and leverage.
On why traders aren’t buying Fed’s ‘higher-for-longer’ vision
Preston Caldwell, chief US economist at Morningstar
“We continue to expect a faster pace of fed funds rate cuts than what the Fed currently projects, as we’re anticipating a faster pace of inflation reduction”
TD Securities analysts
“Given our view for slowing GDP growth in Q4, a shrinking imbalance between labor supply and demand, and still moderate core inflation, we continue to expect the (Federal Open Market) Committee to keep the fed funds rate unchanged at current levels”
On Goldman Sachs Splitting With Regulators on Risk That Basis Trade Poses
“Although the buildup in basis positions bears watching, it does not appear particularly concerning to us at the moment… do not think the trade poses a major risk to Treasury markets in the near term
On Inverted US yields luring investors into short-term bonds
Adam Coons, PM at Winthrop Capital Management
The absolute yield on short-term Treasuries is extremely attractive. Currently, 2-year Treasuries are yielding over 5%, a level that has not been present in almost 20 years… the 2-year note is out-yielding the S&P 500 by over 3.5%, which is also the highest difference in 20 years… We are anchoring portfolios with the higher yielding short-term bonds. We are then reducing or eliminating exposure to bonds with maturities 3-9 years and instead investing into duration through 10-30 year bonds”
Matt Dmytryszyn, CIO at Telemus
“The key reasons to own a long-dated bond is to lock in current interest rates and protect against lower rates in the future… can be viewed as protection against a softer economy where yields may drop”
On Bond Buybacks Scraping Record Lows as Age of Easy Money Ends
Viktor Hjort, global head of credit strategy at BNP Paribas
“A striking feature of the credit market is how unusually low supply has been. When rate hiking started, companies said, ‘Meh, I don’t want to refinance — we’ll wait and see if things improve.’ But we’re now closer to the maturity walls.”
Barbara Mariniello, global co-head of debt capital markets at Barclays
“For liability management, it’s definitely been a lighter year than the past, just given where rates are”
Oleg Melentyev, BofA credit strategist
“The maturity wall is now a year closer, and issuers face decision time regarding what to do with their debt loads… Higher-quality names will likely choose to delever”