Macroeconomic Bond News-New Bond Issues-BondEvalue-30Aug

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Zhenro Launches $ Bond; Fed Hints at Start to Tapering Later This Year; Macro; Rating Changes; New Issues; Talking Heads; Top Gainers and Losers

August 30, 2021

Credit Ratings
Macro News

US markets traded higher on Friday to end the week in the green and hitting new records after Powell’s speech at Jackson Hole, where he signaled that there were no immediate plans to raise rates and that the Fed would continue supporting the asset purchase program. Tech heavy Nasdaq ended 1.2% higher while the S&P was up 0.9%. Nasdaq and S&P added 2.8% and 1.5% during the week. Nearly all sectors ended in the green led by a 2.6% gain by Energy and 1.6% by Communication Services. European markets also inched higher – DAX, FTSE and CAC were up 0.4%, 0.3% and 0.2% respectively. Saudi’s TASI and UAE’s ADX moved higher by 0.5% and 0.4% respectively on Sunday. Brazil’s Bovespa gained 1.7% to reverse Thursday’s losses. Asian markets were mixed – Shanghai and HSI were up 0.5% and 0.3% while Singapore’s STI and Nikkei edged 0.8% and 0.3% lower. US 10Y Treasury yields eased 4bp to 1.30%. US IG tightened 1.9bp while HY CDS spreads tightened 9.9bp. EU Main and Crossover CDS spreads also tightened 0.8bp and 3.8bp respectively.

At the Jackson Hole economic policy symposium sponsored by the Federal Reserve Bank of Kansas City, Fed Chair Chair Jerome Powell said, “The Committee remains steadfast in our oft-expressed commitment to support the economy for as long as is needed to achieve a full recovery,” while adding, “We have said that we would continue our asset purchases at the current pace until we see substantial further progress toward our maximum employment and price stability goals, measured since last December, when we first articulated this guidance. My view is that the ‘substantial further progress’ test has been met for inflation.” He also said, “Even after our asset purchases end, our elevated holdings of longer-term securities will continue to support accommodative financial conditions.”

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New Bond Issues

Zhenro Properties Group $ 363-day green bond at 7.4% area

Xuchang General Investment $ 3Y at 4.8%

New Bonds Pipeline

Adani Green Energy $ 144A/Reg S senior secured green bond
Jinan Financial Holding hires for US$ Reg S bonds
Sun Hung Kai hires banks for US$ Reg S senior bond offering
Axis Bank hires for US$ 144A/Reg S sustainable perpNC5 AT1

Rating Changes

Term of the Day:

Tier 2 Bonds

Tier 2 bonds are debt instruments issued by banks to meet their regulatory tier 2 capital requirements. Tier 2 capital (and thus tier 2 bonds) rank senior to tier 1 capital, which consists of common equity tier 1 (CET1) and additional tier 1 (AT1) capital. CET1 consists of a bank’s common shareholders’ equity while AT1 consists of preferred shares and hybrid securities or perpetual bonds. Tier 2 capital consists of upper tier 2 and lower tier 2 wherein the former is considered riskier to the latter. We have summarized banks’ liability structure in the table below.

Bank capital structure

From a bond investor’s perspective, tier 2 bonds are senior, and therefore less risky, compared to AT1 bonds as AT1s would be the first to absorb losses in the event of a deterioration in bank capital.

China Construction Bank has announced plans to issue up to RMB 240bn ($37bn) of bonds, of which RMB 120bn ($18.5bn) are expected to be tier 2 bonds.

Talking Heads

On tapering bond purchases this year

Jerome Powell, Federal Reserve Chair

“We will be carefully assessing incoming data and the evolving risks,” he said. “We expect to see continued strong job creation. And we will be learning more about the Delta variant’s effects,” Powell said. “For now, I believe that policy is well positioned; as always, we are prepared to adjust.” “We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis.” “If a central bank tightens policy in response to factors that turn out to be temporary … the ill-timed policy move unnecessarily slows hiring and other economic activity and pushes inflation lower than desired. Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful.”

Kim Forrest, chief investment officer at Bokeh Capital Partners

“Powell understands that tapering will happen, but it’s not going to happen sooner than later.”

On the expectation that taper will start this year as long as pace of labor gains continues – Richard Clarida, Fed Vice Chairman

“I think that if that materializes, then I would support commencing a reduction in the pace of our purchases later this year,” Clarida said.

On investors’ take on how the Fed will manage the exit from ultra-easy monetary policies

Priya Misra, TD Securities global head of rates strategy

“Every Fed change in monetary policy is important.” “But I think it’s particularly more meaningful today because we know growth is slowing and the Fed is trying to exit.” “Are they exiting at the right place? Are they exiting at the right time, at the right magnitude? Given the slowing of the economy, we have questions around both,” Misra said. “The market is pricing in a policy mistake.”

Deepak Puri, chief investment officer for the Americas at Deutsche Bank Wealth Management

“Tapering is important because it’s a very good measure of not only the credibility of the Fed but in terms of communication, how good is the strategy and how transparent it is.” “In 2013, the Fed made mistakes in how to communicate on tapering.”

Shawn Snyder, head of investment strategy at Citi US Consumer Wealth Management

“They’re doing a good job in the sense that they’re really trying to not surprise markets. That avoids a mistake they made in 2013. That’s a positive.” “They’re in a little bit of a tough position, because the delta variant is acting as a wildcard.” “The real question to me is what happens next year,” Citi’s Snyder said. “Do we found ourselves looking at moderating economy and moderating inflation that will make it difficult for the Fed to achieve liftoff on rates? … I think people are very worried about the idea that maybe this isn’t going to work out the way we planned.”

Charles Plosser, former Philadelphia Fed President

“The worry for both the Fed and economy is the danger of applying political pressure to get outcomes that one desires on the political spectrum, and thus undermining the Fed’s independence.” “Powell’s in a delicate spot.” “We are in a period of time where monetary and fiscal policy are at its most stimulative level we’ve seen in 75 years,” Plosser said. “They need to ask the question, what role does policy play in making this inflation more persistent than it otherwise would prove to be.”

On bond traders intensifying focus on jobs for Treasuries’ next step

Gene Tannuzzo, portfolio manager at Columbia Threadneedle

“Powell did an exceptional job of trying to separate the requirements and thresholds for tapering as being very different — saying there was a substantially more stringent test for rate hikes.” “So I think if it is better-than-expected data through this delta surge and the tapering is happening, that the yield curve could steepen.”

Vineer Bhansali, founder of asset manager LongTail Alpha

“People are going to come back on Monday with the view that the Fed is almost unanimous on tapering coming.” “The bond market is going to recalibrate, and we’ll start seeing a Treasury market selloff.”