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Bond Market Insights - Mon, 20 Mar 2023

US equities were weaker Friday on Friday led by bank stocks. US10yr Treasury yields were down 15bps to 3.43%, down 27bps over the week. US2yr yields down 32bps Friday to 3.84%, a move of 75bps on the week prior.

The matter of most concern this morning is the demise of Credit Suisse. UBS will acquire Credit Suisse Group AG for an all-share consideration of CHF 3bn which does not require shareholder approval under the emergency measures. The Swiss government will extend a CHF100bn liquidity facility as well as CHF9bn second-loss-guarantee, CHF5bn of first-loss having been extended to UBS.

FINMA said the extraordinary government support will trigger a “complete write-down of AT1 shares” to zero, referring to the CHF15.8bn of CS AT1s, which carry Permanent Writedown features.

AT1 shares are created when the issuer of Additional Tier 1 bonds experiences a credit event, at which point the bonds are converted into equity or the value is wiped out. Writing off the value in this instance increases Credit Suisse’s core capital but wipes out AT1 investments.

As some equity value remains in Credit Suisse, holders of AT1 paper may challenge having the value of their AT1 shares written down to zero. If AT1 debt can be written off but common equity is made good, the value of the general AT1 debt market could be severely affected.

There was no reference to the CoCo-T2 and UBS CEO didn’t confirm in the Q&A but likely spared given it’s not mentioned in FINMA statement.

UBS CEO was also asked if the CS Group and OpCo bonds would move to UBS to which he responded positively; however not clear to me if there’s an implicit or explicit guarantee or replacement over time etc so base case these remain obligations of CSG and CS as fully-owned subsidiaries of UBS.

Asia AT1s opened 4-5pts lower and there is an expectation that European ATs are indicated 5-7pts lower. Initially Asian AT1s should track their Europe counterparts, but it is worth noting that Asian AT1s do generally have more benign terms.

Initial action in the China AT1 space has been buying quality names on the dip. ICBCAS 3.2 Perp traded as high as 92.50, almost back to Friday’s close. Through the morning lower quality has underperformed quality and non-China has underperformed China. China AT1s are down 0.5pt whereas Korea is down 2-3pts and HK names are down 5-7pts. Bank of East Asia perps were down 8pts at one point then bounced with hedge funds and the street short covering. Similar theme in Tier 2’s with China 5-10bp wider, Korea 10-20bp wider and HK 30bp wider. The street is starting to feel heavy in this sector. Corporate names have been quiet.


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