Trevor Cooper FCISI
Naisbitt King Bond Commentary 1st February 2023
Central bank decisions – the FOMC ‘only’ hikes by 25bps to 4.5%-4.75%
No let up in bond issuance in all currencies
Problems get worse for the world’s third richest man
Optimism has reappeared in credit markets in the last few months as yields retreated with the thoughts of the rate of inflation levelling off later this year and a softer recession than have been thought. However, the Fed seems to believe that inflation still needs to be supressed and thinks that it’s unclear economic activity is heading in a direction consistent with durably slowing inflation. Today we saw the Federal Open Market Committee (FOMC) raise their rate by an expected target of 25bp for the second consecutive session. Ultimately, this meeting today signalled that the Fed’s hiking cycle is nearer completion, but not yet done. After today it is likely we will see a further couple of 25bps rate increases before levelling off to prepare for decreases in the second half of the year. The Fed said that they are determined to get its elevated inflation rate down to 2% and further rate increases will be necessary. Historically, bonds have done well after the penultimate interest rate hike in a monetary policy tightening cycle by the Federal Reserve.
Inflation in the euro area slowed more than economists’ expectations in January, according to a report. The core measure remained high suggesting the European Central Bank’s concern over how much more interest rates must rise. The central bank is expected to lift its policy rate by 50bps tomorrow. The Bank of England’s rate decision is also due tomorrow with a 50bps rise to 4% expected.
New issuance - UK’s 30-year bond
Last week the UK government launched a £6bn ‘no grow’ 30-year bond. There was no shortage of takers as the orderbook grew to £68bn by the time they closed. This issue success was despite a background of lower than expected PMI figures and higher than expected borrowing published the same day. The bonds’ coupon is 3.75%, with a maturity date of October 2053. The last time the UK government launched a 30-year bond was in October 2021. Then the coupon was just 1.5%.
As regular readers would know we regard the corporate bond new issue market as a strong signal of market strength.
In most years the majority of annual new issues were launched in the first quarter. Certainly, this year got off to a flying start when over $34bn was successfully launched on just the first dealing day of the year. By the end of January $143.9bn was brought to the market against the $130bn projected.
The AA didn’t need a jump start
The sterling bond market is still not a seeing much in the way of borrowers using the currency, although there are signs the market could see more issuance this year. The roadside assistance company Automobile Association (AA) chose pounds to raise new capital. The AA sold a £400m secured bond which attracted a very creditable orderbook of £2.3bn which enabled the company to reduce the coupon from 9% at preliminary thoughts to 8.45%. The yield on the bond has now dropped below 8%, an over 2 point price rise. This senior secured bond is rated by S&P at BBB-.
Ashtead Group launches new $750m deal
Last week interesting British American industrial equipment company Ashtead Group launched a senior 10-year bond. First thoughts of the spread on the $750m bond was +240bps before ending at +212.5bps at launch after a strong $5bn orderbook. The secondary market has seen the spread tighten to below +200bp. Ashtead’s senior debt is rated Baa3/BBB both stable.
Saudi Arabia sells $10bn of dollar bonds
The Kingdom of Saudi Arabia amassed a huge book for its latest $10bn bond offering. The kingdom’s orderbook was over $35bn of investors cash for its 3-part deal which consisted of 5, 10.5 and 30-year sovereign debt. Saudi Arabia is rated A1/A-/A, stable/positive/positive. Since the successful launch the spreads on all the tranches tightened. Saudi Arabia’s funding needs for the rest of the year is expected to in the region of 45 riyals ($12bn). Since launch all 3 tranches have tightened their spreads by as much as 35bps.
Adani Group trashed by short seller Hindenberg Research
Last week the shares and bonds of companies associated with the Adani Group crashed lower after U.S. research house, Hindenburg Research*, made extraordinarily negative allegations about the Indian company. All the bonds connected to the Adani Group fell dramatically last week before stabilising.
As we hold senior Adani Ports and Special Economic ZoneLimited (ADSEZ) bonds in several of our portfolios we have consistently researched the company. However, on reading the Hindenberg study we conducted our own deep research. We concluded that ADSEZ bond price levels had fallen too far from fair value and decided not to sell. The investment grade Baa3/BBB-/BBB- all stable ratings on the senior unsecured bonds have been in place since 2015 and we await the rating agencies opinion. Over the weekend Adani published its reply to the Hindenburg’s research saying it is ‘calculated securities fraud’. The twists and turns of this situation are set to continue, today for instance we hear that Credit Suisse has stopped accepting Adani bonds as collateral. This news prompted a further fall in Adani’s share price. It should be remembered that the share price is still higher than it was in March last year. During today the situation has got even more complicated when Adani withdrew their $2.4bn share sale when it’s shares slumped even further. In the fast developing situation we will continue to monitor the company closely.
*Hindenburg Research is an investment research firm with a focus on activist short-selling based in New York City. Named after the 1937 Hindenburg airship disaster,
While we have very little exposure to sovereign debt, it is still worthwhile keeping track of their rating movements. Last month saw rating agencies shifting their ratings on some countries as follows:-
S&P downgraded Hungary’s debt from BBB to BBB-, leaving its outlook at stable. The downgrade followed ‘a series of economic shocks’ to Hungary in the context of the pandemic and the war in Ukraine which has ‘impaired the policy flexibility of fiscal and monetary authorities’. S&P said the stable outlook on the sovereign rating reflected its expectations that Hungary's economy will ‘avoid a substantial economic downturn’ over the next two years. S&P also pointed to the timely availability of European Union funds, which remain suspended under the EU's rule of law conditionality mechanism, as a specific economic risk, but said its "baseline expectation" is for Hungary to reach an agreement with the EU, losing "no substantial part" of the funding.
Fitch upgraded Greece’s long-term debt to BB+ from BB and put its outlook to stable from positive. The agency expects better deficit and debt results and projections, thanks to stronger growth. Fitch also said ‘We forecast a further narrowing of the general government deficit to 1.8% of GDP in 2024 from an estimated 3.8% in 2022, in part due to streamlining of temporary support measures,’. Elsewhere Greece is rated Ba3/BB+, both stable.
Moody’s downgraded Nigeria’s sovereign debt for the second time in less than 6 months due to concerns about the country’s fiscal and external position. The rating agency lowered Nigeria's foreign currency senior unsecured debt ratings to Caa1 from B3 and set the overall outlook to stable. Their assessment also highlighted the government’s inability to secure external funding and the significant fiscal deficit in the 2023 budget proposal. The decline in oil production and capital flight will also gradually deteriorate Nigeria’s external reputation. Many of the country’s banks have also have downgraded. Elsewhere Nigeria is rated B-/B-, both stable.
Trevor Cooper FCISI
Chief Executive Officer
Chief Investment Officer