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US Treasury yields ticked higher by 1-3bp on Thursday. US Retail Sales for January were worse than expectations, coming at -0.8% MoM vs expectations of -0.2%. Core Retail Sales also softened, at -0.5% vs expectations of 0.2%. US Initial Jobless Claims for the prior week fell to 212k, from 220k a week prior to it. Looking at credit markets, US IG and HY CDS spreads tightened 1.6bp and 8.5bp respectively. S&P and Nasdaq rallied 0.3-0.5%.
European equity markets ended higher too. Credit markets in the region saw the European main CDS spreads tighten by 1bp and crossover spreads tighten by 2.6bp. Asian equity markets have opened in the green today. Asia ex-Japan IG CDS spreads widened by 1bp. Japan’s economy slipped into recession after shrinking for a second consecutive quarter due to pale domestic demand. GDP contracted at an annualized pace of 0.4% in the final quarter of 2023, following a revised 3.3% retreat in the previous quarter.
UBS raised S$650mn via a PerpNC5.5 AT1 bond at a yield of 5.75%, 37.5bp inside initial guidance of 6.125% area. The subordinated notes are rated Baa3/BBB- (Moody’s/Fitch). If not called by 21 August 2029, the coupon resets then and every five years thereafter at the 5Y SORA OIS plus the initial spread of 277.6bp. The notes have a dividend stopper in place. A redemption could take place in whole, but not in part due to a tax or regulatory event as mentioned in the prospectus. Upon the occurrence of a trigger/viability event prior to the occurrence of a conversion capital availability event, a contingent write-down will occur – the full principal and any accrued and unpaid interest thereon will automatically and permanently be written-down to zero on the applicable write-down date.
Dividend stopper is a common covenant seen in perpetual bond structures that requires the bond issuer to not pay a dividend, if it decides to stop coupon payments on the perpetual bonds. Some contingent convertible (CoCo) perpetual bonds have a clause that allows the issuer to skip a coupon payment at their discretion, if the financial situation of the issuer is stressed. In such cases, a dividend stopper covenant is beneficial to the CoCo bondholders as it restricts the issuer from paying dividends on its equity in times when it has not paid coupon to its CoCo bondholders. This is why the presence (or absence) of a dividend stopper covenant is seen as the determining factor on whether the CoCo perpetual bonds are not (or are) subordinated to its equity.
On May Take ‘Some Time’ to Hit Rate-Cut Threshold – Fed’s Bostic
“The evidence from data, our surveys, and our outreach says that victory is not clearly in hand, and leaves me not yet comfortable that inflation is inexorably declining to our 2% objective. That may be true for some time, even if the January CPI report turns out to be an aberration… rate of inflation will continue to decline, but more slowly than the pace implied”
On US won’t follow Japan, UK into recession – White House’s Brainard
“Because inflation has come down so quickly, we anticipate the environment to be quite benign… we have never had a year where inflation has declined this fast, alongside robust growth and a stable, low unemployment rate”
On Bond Market Jolted as Retail Sales Slump Complicates Fed’s Task
Gregory Faranello, head of US interest rates at AmeriVet Securities
“It’s been whiplash this week. Fed is telling the market, ‘We are not ready to lower rates,’ and the data has co-operated for the most part.”
Jan Nevruzi, US rates strategist at NatWest Markets
“Rates markets seem to like the retail report…. control group in retail sales is showing weakness, which will feed into the first-quarter GDP”