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Bond Market Insights - Tue, 21 Mar 2023

What a difference a day makes! Mondays panic saw a meltdown in prices as the market got to grips with the SNB move on AT1’s. CS AT1’s are now trading as “Litigation Stubs”. Bond holders receive this new security in exchange for their existing bonds. It represents a partial interest in the outcome of the litigation or bankruptcy proceedings. Yesterday EUR denominated CS AT1’s were being traded with Loan Market Association Claim documents (a proof of holding) in European time, priced at 1.25/2.00.

The broader AT1 market traded down 5-10 pts during the Asia morning yesterday, then down 10-15 pts as Europe walked in and there were a few one-off prints at even lower levels. Generally private banks and real money selling with HF buying.

The tone shifted when the ECB and the European Banking Authority put out a statement including "...common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier One be required to be written down." The BOE did the same shortly thereafter.

AT1’s bounced hard with buyers stepping back in, trading 5-7 pts off the lows, closing down 5-8 pts having seen heavy volumes.

Asia IG opened 4-8bps tighter this morning after positive a stable US session, led by short covering in AT1s. An example of the bounce back is HSBC 8% perp, which had traded at a low of 83.00/85.00 yesterday and was quoted at 90.50/92.50 this morning. Funds were buying beaten up names like BNKEA and Korea AT1s before reaching a soft patch heading into lunch when the market reversed.

Back in the relatively calm world of interest rates (relatively) expectations are for the Fed to deliver a 25bp rate hike at this Wednesday's FOMC meeting. Powell will probably emphasize the heightened uncertainty about the outlook given recent events while reinforcing the view that the banking system remains sound and the Fed stands ready to provide liquidity as needed.

US Treasuries are closed this morning due to the Japan holiday.


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