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US Treasuries pulled back yesterday after witnessing a sharp rally last week as the 2Y and 10Y yields went up 5-7bp. The peak Fed Funds Rate was up 1bp. Minneapolis Fed President Neel Kashkari, an FOMC voter said that it was too early to declare victory over inflation, despite positive signs, whilst emphasizing on data dependency. US credit markets saw IG CDS spreads widening by 1.5bp and HY spreads widening by 7.4bp. S&P and Nasdaq rose 0.2-0.3%.
European equity markets closed mixed. In credit markets, European main CDS spreads were wider by 0.7bp and crossover spreads widened by 5.3bp. The Eurozone’s HCOB PMI fell to 46.5 in October from September’s 47.2, its lowest reading since November 2020 during the peak of the pandemic. Economists note that the data indicates chances of a recession. Asian equity markets have opened weaker today. Asia ex-Japan IG CDS spreads tightened by 5bp.
HSBC raised $2bn via a 11NC10 Tier 2 bond at a yield of 7.399%, 25bp inside initial guidance of T+300bp area. If uncalled, the coupon will reset at the overnight SOFR plus a spread of 302bp and will be paid quarterly. The bonds have expected ratings of Baa1/BBB/A-. The new Tier 2s offer a 11bp new issue premium over its older 6.547% 2034s that currently yield 7.29%. Proceeds will be used for general corporate purposes and to maintain or further strengthen the issuer’s capital base.
JP Morgan raised €2bn via a 8NC7 bond at a yield of 4.457%, 25bp inside initial guidance of MS+155bp area. If the bonds are uncalled, the coupon will reset at the 3M EURIBOR plus a spread of 128bp and will be paid quarterly. The senior unsecured bonds have expected ratings of A- (S&P), and received orders over €4bn, 2x issue size.
BNP Paribas raised €1.5bn via a 9NC8 senior non-preferred bond at a yield of 4.762%, 25bp inside initial guidance of MS+185bp area. If the bonds are uncalled, the coupon will reset at the 3M EURIBOR plus a spread of 160bp and will be paid quarterly. The bonds have expected ratings of Baa1/A-/A+, and received orders over €2.25bn, 1.5x issue size.
Santander USA raised $500mn via a 8NC7 bond at a yield of 7.66%, 15bp inside initial guidance of T+315bp area. If uncalled, the coupon will reset at the overnight SOFR plus a spread of 328bp and will be paid quarterly. The senior unsecured bonds have expected ratings of Baa2/BBB+/BBB+. Proceeds will be used for general corporate purposes.
Bombardier raised $750mn via a 7NC3 bond at a yield of 8.75%, in-line with the levels during the initial price talks. The senior unsecured bonds have expected ratings of B2/B. The new bonds offer a 60bp yield pick-up to its existing 7.5% 2029s (callable in 2026) that currently yield 8.15%.
Guangxi Financial raised $150mn via a 2Y Green bond at a yield of 7.5%, 20bp inside initial guidance of 7.7% area. The senior unsecured bonds have expected ratings of BBB (Fitch) and have a change of control put at 101. Proceeds will go to refinancing certain medium-term or long-term offshore indebtedness in accordance with the NDRC Certificate and the Green Finance Framework.
Korea National Oil Corp (KNOC), a state-owned oil and gas company, raised $800mn via a two-tranche deal. It raised $300mn via a 3Y bond at a yield of 5.25%, 35bp inside initial guidance of T+115bp area. The new bonds are priced 5bp tighter to its existing 4.75% 2026s that yield 5.55%. It also raised $500mn via a 3Y FRN bond at a yield of 6.436%. The floating coupon will reset at the overnight SOFR plus a spread of 108bp and will be paid quarterly. The senior unsecured bonds have expected ratings of Aa2/AA (Moody’s/S&P). Proceeds will be used for general corporate purposes and net proceeds will not be used for any activities relating to the construction or development of oil sand projects. The bonds have a change of control put at 100 if the Korean government ceases to own and control (directly or indirectly) at least 51% of KNOC.
Earnouts are a contractual provision during a merger or acquisition, providing for contingent additional payments from the buyer of a company to the seller’s shareholders. Essentially, earnouts state that the seller of a business would receive compensation in the future if the merged/acquired business achieves certain financial goals. Earnouts help bridge the differing views that both parties may have regarding the M&A agreement on an upfront cash price or valuation for example.
On Hedge Fund Man Group Sees Bearish Emerging-Market Bet Paying Off
Lisa Chua, New York-based PM at Man Group
“We’re entering a period where we are only just starting to see the beginnings of a correction that we talked about. There is room for another leg of correction on the spread side… The recent Fed meeting does not change the emerging-market debt outlook we discussed; namely that rising credit risks are yet to be reflected in spreads”
On DoubleLine Overweight Blue-Chip Debt for First Time in Decade
“We find this to be one of the most attractive periods for fixed income overall, but specifically for corporate credit. We think it’s one of the most interesting times over basically the last 10 years… The odds of a positive return are very high and the odds of a negative return are relatively low”
On Fed having more work to do to control inflation – Minneapolis Fed President, Neel Kashkari
“The economy has proved to be really resilient even though we’ve raised interest rates a lot over the past couple of years. That’s good news. We haven’t completely solved the inflation problem. We still have more work ahead of us to get it done… I’m a little nervous about declaring victory too soon”
On Barclays expecting Fed to hike rates in January instead of December
“We continue to think the FOMC will need to proceed with additional tightening and will have to maintain a higher rate path than expected by the market, with no rate cut prior to September 2024”