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Bond Market Insights- Wed, 19 July 2023

USTs were bid into the NY open, following Bunds higher in London after less hawkish commentary from the ECB’s Knot, but then struggled for direction. US industrial production was weaker than expected, down 0.5% in June with a downward revision to May. On the surface retail sales was also disappointing, headline missing expectations but retail control, which captures the bit that matters for GDP, was stronger than expected, up 0.6%mom, consensus at 0.3%, with an upward revision to May, suggesting household consumption for Q2 will be resilient and stronger than expectations. Equities were well supported with banks showing strong earnings. KRE US, the regional bank ETF, was up +3.9%, recovering nicely ahead of the Fed, FDIC and OCC formally unveiling their new bank capital rules on July 27th, when mortgage requirements are set to become more stringent than international standards.

As AI fever continues the largest US mutual fund firms are hitting limits in the additional amounts of tech stocks they can purchase without breaking “diversification” rules. Mutual funds that are SEC registered as “diversified” cannot put more than 25% of their assets into large holdings, defined as those representing >5% of the fund’s portfolio. This leaves Fidelity’s $108bn Contrafund unable to buy any more shares in Meta, Berkshire Hathaway, Microsoft and Amazon, because they made up a combined 32% of its portfolio. There seems to be a hefty concentration risk out there.

In the US IG there were 6 new deals totaling $12.15bln, dominated by $8.5bn two tranche bail-in bonds for Wells Fargo. This brings the weekly total to $19.275bln. In Asia the new Shinhan Finance SHINFN 28 did not do well, despite coming at a wider than expected spread of T+110, it traded down +114. There was also a bit of indigestion in Korea land, but despite this Mirae Asset Securities (DAESEC) (Baa2/BBB) announced IPTs for a new 3yr at T +295 which looks on the cheap side. Korea Electric Power (Kepco) is also in the market, mandating a USD 3yr or 5yr sustainable bond, pricing yet to be seen. Split rated gaming name, Resorts World Las Vegas, joins the fray with a 7yr fixed and a semi annual coupon in the 8.9% area. S&P rates the issuer BB+, Fitch holds it in better stead at BBB-. This has a parental guarantee from Genting Bhd.

In the secondary market here was selling of longer dated Asia TMT paper in New York overnight, despite the firm macro backdrop. This continued this morning and spreads closed into lunch 2-5bps wider. China HY was also sold, with prices down 2pts on average for the likes of Longfor and Ping An Real Estate

One of my favorite split rating credits, Ford (I am also fond of Nissan), has been upgraded by Moody’s from Ba2 to Ba1, a smidge away from investment grade. They note that Ford is no longer reliant on dividends from Ford Motor Credit Company LLC (Ford Credit) to help fund capital expenditures, even after a considerable step-up in capital spending related to the transition to electric vehicles.


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