*Rates & Macro*
Steepening of yield curves globally
This week seemed to be all about steepening government yield curves. Some interesting levels hit this week, for example:
Germany 30 year Bunds became positive again - First time since September 2020
UK 30 year Gilt went above 1% - First time since November 2020
US 2 year Treasury yield hit record low of 0.1013% - Taking out prior low in May 2020
US 10 and 30 year Treasury yields rose to YTD highs
US 5s30s curve exceeded 150bps for first time since 2015
What was driving the moves in Rates?
It seemed to be a combination of factors that include an improving COVID19 situation globally, getting closer to the a $1.9 trillion US stimulus plan and hawkish comments from the Bank of England.
Main positive newsflow around COVID19:
Johnson & Johnson's one-shot vaccine sets the stage for a potential third vaccine to become available in the U.S. within weeks according to the WSJ.
Astra Zeneca Vaccine Shown Equally Effective Against U.K. Variant - Bloomberg
Around the US, restrictions are easing: BBG
Israel has outpaced the world in vaccinating its population against Covid-19. Now the results are starting to come in. And, so far, the news is good for both Israel and the world. VOX
Articles summarizing current state of the US stimulus bill:
The US Senate has passed a budget resolution in a step that sets up the path for Democrats to pass President Joe Biden's sweeping $1.9trn Covid-19 relief package.
The measure passed 51-50 on a party line vote with Vice President Kamala Harris casting her first-ever tie-breaking vote to tip the balance in the early hours of Friday morning.
The approval allows Democrats to push ahead with the budget reconciliation process, enabling the party to pass the relief package without Republican support. Independent
BoE made hawkish comments re negative rates at its rate meeting on Thursday
The Bank of England (“BoE”), who in the past few years have not been known to move global markets with their commentary (other than maybe GBP) surprised markets with hawkish comments around negative rates. The central bank said that it was expecting a fast recovery in UK GDP towards pre-pandemic levels in 2021, led by the UK’s vaccination program. According to my data feeds, 30 Year Gilts weakened 2 standard deviations (vs 30 day price history) and saw yields go above 1% for the first time since November 2020.
Source: CNBC
Central Banks/Politics Commentary
Fed’s George: Fed Is Far Away From Achieving Its Objectives A| Too Soon To Speculate On Timing Of Adjusting Bond Buys
Fed's Evans: Hard-Pressed To See $1.9Tln Fiscal Package Leading To Economic Overheating
Fed’s Bullard: Will Look For Leadership From Powell About When To Start QE Tapering Discussion, Too Early To Start In Midst Of Pandemic - RTRS
RBA to pump $100bn into Australia's economy by extending quantitative easing - Guardian
Italy’s Investors Laud Draghi’s Return to Keep Markets Calm. Italian Financials in particularly rallied on the announcement that Mario Draghi accepted a mandate to be the next premier-designate BBG
The US economy is expected to reach its pre-pandemic peak by mid-2021 [CBO]
Washington — The US economy is expected to grow faster than officials predicted in July 2021, but production will reach its full potential and the number of employed workers will peak before the pandemic. It will take several years to return to. New economic forecast released on Monday.
The Congressional Budget Office expects GDP, the broadest measure of economic production, to return to pre-pandemic levels by mid-year, thanks to the surge in relief spending parliament approved in 2020. Stated. Home or business.
Read more: Newyorknewstimes
*Credit*
Impact of the sell-off in rates on Credit
Different parts of the market have been impacted in different ways. Longer duration investment grade paper has sold off as Treasuries have sold off. This has impacted low coupon debt the most as set out in the examples below:
Source: iShares LQD ETF Bond Holdings / BBG
Each of the bonds listed above are trading below their original issue price. The other observation is that the percentage change in the bonds is not covered by one year’s worth of coupon. This is a problem for existing investors (but not if you are a buy and hold to maturity investor). It could also be seen as an opportunity for new investors who can pick up bonds at a big discount to the original issue price. However, it is not as straightforward as that, since if US 30 year yields were to go out further, these bonds could sell off even more. IG Credit spreads actually tightened on the week around 4bps as the rise in government bond yields compressed credit spreads. US HY credit spreads tightened in circa 29bps and continued to outperform longer duration Investment Grade strategies since HY benchmarks run a much lower duration. Issuers in HY also are more associated with a recovery in the economy (e.g Travel & Leisure and Oil sectors in particular), which is another driver of the strength. Speaking of oil, Brent Crude oil hit levels last seen in Feb 2020 , which is a supportive to many issuers and nations within HY and EM markets.
Source: Yahoo Finance
“COVID19-Sensitive” names issued debt with relative ease this week
Boeing, Whitbread and Lufthansa were just some of the issuers that came to market this week to issue bonds. Each of these issuers come from sectors that saw their spreads widen materially during the depths of the market wide sell-off during Q1/Q2 2020. The positivity around global “re-opening” enabled these issuers raise debt at much more reasonable levels.
Whitbread (owner of Premier Inn in the UK) took the “green bond” route and managed to issue low cost long dated debt:
Whitbread has today priced the issue of £300m 2.375% green bonds due May 2027 and £250m 3% green bonds due May 2031. Whitbread has also reached an agreement with its banks to extend the final maturity date of its revolving credit facility from September 2022 to September 2023.
Read more here
Rackspace (Datacenter firm) issued low coupon debt in the US HY Market
Rackspace priced $550M of 3.50% 1st Lien 2028 notes rated B1/B+. According to a BBG article, this bond (along with others in the HY market) came about as a result of “reverse broking” by investors telling companies to refinance debt now. Extract of article:
Rackspace sold a $550 million bond on Tuesday to help refinance its existing leveraged loan, and already had $1 billion of interest from investors before launching the offering, according to other people familiar with the matter. Link
Asda Supermarkets set to issue one of the largest ever Sterling HY Bonds
Plenty of excitement from HY bond investors ahead of the upcoming large Sterling HY issuance financing the acquisition of Asda by the Issa Brothers and TDR Capital. According to credit market research firms and market participants, the deal is likely to be very popular. My guess is that the big name, rare issuer/sector and high yield aspect of the issuer will be highly supportive for demand. Of course it’s important to see where the deal prices. The reaction from news outlets and equity analysts has been predictably bearish, focusing on the “junk” aspect of the rating and the Private Equity involvement in the deal. The PE guys are acting rationally, in that they are borrowing when rates are ultra-low, and when there is a queue of bond investors waiting to hand over their money. Where the journos might have a point is around what the PE guys will do with respect to the job cuts and investment in the business more generally. However, reading this article, seems like Walmart didn’t invest much in the business either during their ownership…
Alibaba saw good demand for its bonds this week
Reuters- Alibaba Group Holding Ltd’s $5 billion U.S.-dollar bond offering received demand for eight times the debt offered, underscoring global investors’ faith in founder Jack Ma’s e-commerce behemoth despite a regulatory crackdown on his empire. Reuters
*Financials*
Saudi NCB Bank raised an AT1 Sukuk at 3.5%, lower than where most large European Banks are issuing - BBG
The NCB issue is set to be unrated. The same article refers to two Omani lenders not to call AT1 instruments worth a combined $600 million last year.
*Emerging Markets*
Ethiopia surprises debt market by seeking debt restructuring
Ethiopia has said it plans to seek a restructuring of its sovereign debt under a new common framework of the G20 group of major economies designed to help with the financial pressures of COVID-19, and is examining all options.
The news pushed its government bonds to their biggest daily fall on Friday amid worries that private sector holders will be forced to take a writedown and also trigger a default in the eyes of the main credit rating agencies.
*Ratings*
Fitch Ratings Agency Downgraded Panama to 'BBB-'
This from Fitch -> Panama's downgrade to 'BBB-' reflects the severe weakening of public finances due to the economic disruption caused by the coronavirus pandemic, which has exacerbated underlying weakening fiscal trends predating 2020. The unprecedented GDP contraction and government revenue loss has prompted a material rise in public debt. Read in full
Fitch Downgraded Rolls-Royce to 'BB-'; Outlook Negative
Fitch -> The downgrade reflects Fitch's expectations of fewer engine flying hours (EFH) for 2021 leading to reduced fund from operations (FFO). This, combined with higher cash outflows from working capital changes, reflects a materially greater Fitch-calculated free cash outflow for 2021 of around GBP2.1 billion. Fitch Ratings
Disclaimer: Not Investment Advice. I may own securities mentioned in this blogpost. Any viewpoints expressed are solely mine.