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US Treasury yields were higher by 4-5bp across the curve on Friday. Preliminary business activity indicators in the US held steady in November. The S&P Global US Composite PMI for November was unchanged from last month, at 50.7 but slightly above estimates of 50.4. The Manufacturing PMI dropped to 49.4 from 50.0 in the prior month, slightly below estimates of 49.9 while Services PMI edged higher to 50.8 from 50.6 in the prior month, above estimates of 50.8. US credit markets saw IG CDS spreads widen 0.5bp and HY CDS spreads move wider by 1.3bp. US IG corporate bond spreads, measured by Option Adjusted Spreads (OAS), are at 108bp. These are its tightest levels since April 2022, indicating easing risks and thereby a reduced premium to own corporate bonds as compared to US Treasuries. Equity markets were near flat with the S&P almost up 0.1% and the Nasdaq down 0.1% in a holiday-shortened trading session on Friday.
European equity markets were slightly higher. In credit markets, European main CDS spreads were wider by 0.5bp and crossover spreads tightened by 0.4bp. Asian equity markets have opened in the red today. Asia ex-Japan IG CDS spreads were wider by 1.8bp.
Luso International raised $280mn via a 10NC5.5 Tier 2 bond at a yield of 7.5%, 30bp inside initial guidance of 7.8% area. Both the issuer and the newly issued bonds are unrated. The issuance received orders over $580mn, 2.1x issue size. Proceeds will be used to replenish the issuer’s Tier 2 Capital.
South African Electricity Producer Eskom Upgraded To ‘B’ On Revised Government Support; Outlook Stable
Bahrain Outlook Revised To Stable From Positive On Weaker Fiscal Consolidation; ‘B+/B’ Ratings Affirmed
Moody’s changes outlook on Bayer to negative, affirms Baa2 ratings
Option Adjusted Spread (OAS) refers to a measure of the credit spread of a bond with embedded options relative to a benchmark, similar to the z-spread. The key difference between OAS and z-spread lay in the optionality. When comparing two bonds – one with an embedded option and one without – OAS is a better measure compared to z-spread as the former adjusts for/removes the impact of optionality for a like-to-like comparison. Put simply, OAS ≈ Z-Spread + Option cost. On a technical note, the above formula is not an exact equation as the z-spread is calculated from the spot curve while the OAS is calculated from the forward curve.
The OAS is less than the z-spread for callable bonds and greater than z-spread for puttable bond.
On Stressed HK Developers Lure Private Credit as Funding Gap Looms
Jasmine Chiu, a Hong Kong-based lawyer in real estate finance at Mayer Brown
“There are family offices and asset management companies which are establishing this new business line just as private credit funds. They all seek to increase their portfolios for private credit.”
Keith Tsang, ED of investment banking at CBRE HK.
“It’s a double whammy where your cost of finance is going up, (and) your valuation’s coming down”. Private credit borrowers in Hong Kong have “become more and more distressed.”
On Throwing Caution to the Wind to Keep Up With Stock Rally
Priya Misra, PM at JPMorgan Asset Management
“The Fed’s willingness to pause here and look through the strong data is allowing soft landing optimism to take over… the lack of hedging reflects complacency on inflation and living on a prayer”
Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets
“There has been absolutely no demand for hedging — the cost of protection using various metrics are all near lows looking out five years… volatility continues to be suppressed in our market due to volatility selling strategies”
On China Bank-Backed Dollar Bond Sales Plunge Amid Default Jitters
Charles Chang, Greater China country lead at S&P
“At the end of the day, the question for the standby letter of credit providers is: are they being compensated sufficiently to take on the risk of default of the issuer?”
On Deutsche Seeing Rate Cut by RBI Boosting India’s Bond Market
Amrish Baliga, MD of financing & solutions group at Deutsche Bank India
“If there are 25-50bp rate cuts next year as being forecast, we anticipate the market to take off as well… Inflation is the elephant in the room”