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US Treasury yields fell by 7-8bp across the board on Wednesday and equity markets dropped, following fresh concerns about regional lenders after New York Community Bancorp’s surprise loss. It reported a loss of $252mn for the previous quarter, compared with a $206mn profit that analysts had estimated. Revenues of $886mn fell short of expectations for $932mn. Also, some support to treasuries was provided after US ADP private payrolls increased by 107k in January, lower than the previous month’s revised 158k print and estimates of 150k. On the other hand, the US Treasury said that it will issue $121bn of longer-term securities at its quarterly refunding auctions next week that would see them sell 3Y, 10Y and 30Y securities. This is an increase from what it had planned previously, but added that no more increases are likely at least for the next several quarters.
The FOMC held interest rates steady as expected. Jerome Powell all but ruled out hopes of any rate cuts during their policy meeting in March, although he signaled that they were open to cutting borrowing costs eventually. The FOMC said that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%”. He added that the economy was in “good” shape and that the labor market was “strong”. Looking at credit markets, US IG and HY CDS spreads widened 2.3bp and 10.7bp respectively. Equity markets saw the S&P and Nasdaq fall 1.6% and 2.2% respectively.
European equity markets ended lower too. Credit markets in the region saw the European main CDS spreads widen by 2bp and crossover spreads widened by 9.7bp. Asian equity markets have opened in the red today. Asia ex-Japan IG CDS spreads tightened by 1.3p.
Qingdao Huatong raised $280mn via a 3Y bond at a yield of 6.8%, 50bp inside initial guidance of 7.5% area. The senior unsecured notes are unrated. The notes have a keepwell provider in Qingdao China Prosperity State-owned Capital Investment Operation Group Co Ltd. Proceeds will be used for refinancing offshore debts.
Science City Guangzhou raised $400mn via a 1.5Y green bond at a yield of 6.8%, 40bp inside initial guidance of 7.2% area. The senior unsecured notes are rated BBB by Fitch. The bonds have a change of control put at 101. Proceeds will be used to finance or refinance eligible green projects as defined in its green finance framework.
BBVA raised €1.25bn via a 12NC7 Tier 2 bond at a yield of 4.909%, 35bp inside initial guidance of MS+275bp area. The bonds are rated Baa2/BBB/BBB-, and received orders of over €5.3bn, 4.2x issue size. Proceeds will be used for general corporate purposes.
A keepwell provision is a legal agreement between a parent company and a subsidiary to ensure solvency and financial stability of the subsidiary for the duration of the agreement. Keepwell provisions are included in bond terms to offer bondholders confidence on the issuer’s ability to repay. The keepwell structure emerged around 2012-2013 to assuage concerns of investors over a bond issuer’s creditworthiness. However, it is important for investors to understand that keepwells are not a guarantee that the parent company will support the subsidiary in the event of a default, and there has previously been no precedent on the enforcement of keepwell structures.
On Markets Wrong to Write Off Inflation – PGIM Fixed Income Co-CIO, Greg Peters
“I think that’s a byproduct of inflation being perceived to be dead. And look, it’s been a miraculous disinflationary trend. The question on the table now, at least for me, is this so-called last mile… tendency will be for rates to remain kind of where we are broadly”
“That’s already beginning to play out in some of the frontier economies and the hard-currency bonds have shown quite good positive momentum… There is probably quite a lot of upside in the distressed sovereign category”
On Pimco, DoubleLine, BlackRock Embracing Bond-Market Swings
Daniel Ivascyn, CIO at PIMCO
“We really like this environment… tendency for some overshooting in rates in both directions allows us to express tactical views… central banks aren’t probably going to cut as quickly early in the year as markets anticipate”
Marilyn Watson, head of global fundamental fixed-income strategy at BlackRock
“Given the repricing that we’ve seen… we can now actually get the underlying fundamentals of individual bonds”
On Shrugging Off Warnings on US Deficit, Stocks – Steve Eisman, ‘Big Short’ Investor
“I’m very blissful… This argument about the deficit has been going on for forty years”… now “more long-oriented” on the US market.