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  • Trevor Cooper FCISI

Naisbitt King Bond Market Commentary 1st April 2022




  • Central banks prepare to raise rates

  • Higher yields – tighter spreads

  • Russian bonds continue their crash

  • Primary issuance breaks records

  • Sukuk issuance surged 39% last year

  • El Salvador’s abandons its attempt at the world’s first Bitcoin bond


Jerome Powell, the Fed Chairman, said that the U.S. central bank is prepared to raise interest rates by half a point at its next meeting in May if needed. The quarter point rise we saw at the last meeting in mid-March ended two years of near-zero borrowing costs. The Fed’s greatest worry, of course, is inflation which is running the hottest for 40 years, is the driving force behind possibly more aggressive moves going forward. With the Ukrainian war still raging, inflation roaring ahead and central banks raising rates, government bond yields rose steeply, however credit spread indices fell. At its low point in early March the yield on the 10-year Treasury bond was down at 1.73% and the investment grade credit index stood at 167. Markets are nothing if not volatile. Earlier this week the yield on the 10-year broke through the 2.50% level, last seen in early 2019. It has now retreated to 2.36% and the credit spread index has reduced to 136, lessening the damaging sovereign yield rise on credit bond portfolios. Credit spread indices express the average yield of credit bonds above that of the so-called risk-free yield of sovereign bonds. Another dynamic change in the government bond market has been the shape of the yield curve. In a move that saw the curve invert a few days ago, the yield on the 5-year Treasury bond rose above that of the 30-year for the first time since 2006, suggesting an economic downturn or even a recession.


Primary bond market issuance breaks records


Considering the challenges, the world has been facing March was an extraordinary month for the dollar bond primary market, proving the new issue market is truly open for business. The year-to-date supply has pushed through last year’s total, itself the second largest on record. March saw a total of over $229.9bn investment grade dollar bonds issued; a monthly level that has only been beaten three times before. This brought the years total issuance to $453.4bn, beating last year’s first quarter total by 4%. AT&T’s subsidiary, Magallanges, the WarnerMedia spinoff, launched an 11-tranche deal raising a massive $30bn. At its peak the order book was a staggering $106bn – the third largest order book on record. Investment grade dollar issuance has now surpassed that of 2021. GlaxoSmithKline (GSK) raised $8.75bn to help fund the spinoff of its consumer-health, Haleon PLC, business. The 7-part deal again attracted a huge orderbook reaching $43bn at its peak. GSK also raised money, again in the name of Haleon, in euros and sterling with 3 euro and 2 sterling deals. Haleon is rated Baa1 stable. In the last major deal of the month BBB rated Corebridge Financial’s $6.5bn deal received an amazing reception with a $33bn orderbook. It is true that issue spreads moved wider throughout the month, matching investors demands for more yield, but this didn’t put off borrower’s desire to raise cash via the dollar market. More than 80% of new issues are now trading at a tighter spread since their launch. April is historically a much slower month than March with a projected $90bn - $100bn this month.


It is true that issue spreads moved wider throughout the month, matching investors demands for more yield, but this didn’t put off borrower’s desire to raise cash via the dollar market. More than 80% of new issues are now trading at a tighter spread since their launch.


A sale of a €2.17bn 15-year European Union (EU) social bonds last week amassed an orderbook of more than €35bn. At 16 times, the bond that has a coupon of 1.125%, gained the highest cover ratio for any public debt sale from the bloc. The EU also successfully launched a €10bn 1% 10-year bond which itself accumulated an impressive book of €63bn.


The euro primary market also experienced a record, but for one of the lowest months on record. Caution for euro-credit prevailed in favour of dollar issuance. Borrowers have stayed on the side-lines after Russia’s invasion pushed euro funding costs for the region’s best-rated firms to the highest since the early months of the coronavirus pandemic in 2020.


Russian bonds offer a mixed picture. JPMorgan, which is listed as a paying agent on the prospectus for Russia’s debt due in 2030, processed a payment amounting to nearly $447m. That covers a $87.5m coupon payment and a $359m principal payment. Questions arose over Russia’s ability to service its 2030 debt last week after Clearstream, the Luxembourg-based bank that was listed as the clearinghouse in bond documents, blocked the account for the National Settlement Depository. The NSD receives the Russian government’s payments on some of its foreign bonds for distribution. Russia also repaid interest and principal on $2bn of dollar-denominated bonds due on 4th April, with the Finance Ministry offering to buy back some of the debt and pay with rubles.


We saw Gazprom and Russian Rail crash, with their dollar bonds now slightly recovering to trade around 40.00. Even Gazprom’s next maturity, a $1bn bond maturing in July, is now priced as low as 65.00.


Russia’s Finance Ministry said coupon payments on two dollar bonds are with Citigroup, and that the nation has fulfilled its obligations to investors, even as bondholders in Europe say they have yet to receive the cash. Gazprom has started telling clients how to pay for the gas they buy after President Vladimir Putin said purchases from “unfriendly” nations including Europe would need to be settled in rubles.


Very sadly Ukraine’s ratings have also been pulled down by the war. As with Russia’s debt, the Eastern European country has been downgraded with its bonds crashing. It is now rated B-/CCC/CCC+.


Sukuk bond issuance record


Global sukuk issuances surged 39% to reach $252bn in 2021 and has continued to grow this year as economies recover from the coronavirus pandemic. The majority of issuances came from Indonesia, Malaysia, the Gulf Co-operation Council (GCC) countries, Turkey and Pakistan.


So far this year Islamic finance deals have had their best ever start. Saudi Arabia and Turkey were two of the biggest issuers. Sales of new sukuk maturing in at least a year have touched nearly $53bn worth in all currencies, so far in 2022. Despite the record breaking start, it is thought that sukuk issuance will be flat for the rest the year as the higher oil price may reduce sovereign country funding needs. Growth in dollar-denominated sukuk just about halted in March following the Russia-Ukraine conflict an increase in oil prices, interest-rate hikes and inflation pressures.


Rising oil and commodity prices have varying impacts on key Islamic finance markets. Net oil exporters form the majority of key sukuk markets at 70%, with the rest being net oil importers. The GCC countries’ currency peg to the dollar is an advantage. Net oil-importing markets are expected to face rising funding needs, part of which is expected to be met through sukuk issuance.


All about Bitcoin


I wrote about Bitcoin a couple of times last year. First in May, when I highlighted its extreme volatility, and that NK wouldn’t be purchasing Bitcoin, nor other cypto assets, at any stage. Secondly in December I described the idea that El Salvador was going to issue the world’s first volcano Bitcoin bond. In July Bitcoin was priced just under $35,000, it was then rushed up to nearly $68,000 before crashing back to its current level of $46,600 earlier today – that’s volatility! Proper research based valuation of Bitcoin is of course impossible. With no balance sheet to pore over and no GDP to focus on it only has its past performance as a judgment and we all know the disclaimer that financial companies must give to their clients about that! Bitcoin and other crypto currencies have, like gold, no income, and no cash flows. Unlike gold there is no underlying product though.


El Salvador seems to have abandoned its attempt to launch of the world’s first Bitcoin bond which would have raised $1bn. The Central American country has been trying to issue a crypto currency bond for months. Last year the country became the first to adopt Bitcoin as legal tender. In February Fitch downgraded the country two notches from B- to CCC, negative, on ‘heightened risks stemming from increased reliance on short-term debt’. Elsewhere the country is rated Caa1/B-, both with negative outlooks. El Salvador is still drowning in distressed debt, its 3-year 5.875% sovereign debt is now priced below 56.00, and a yield of 29%, instead of the 100.00 less than a year ago. The country is also still seeking a $1.3bn loan from the IMF but talks have been hindered by the lenders Bitcoin concerns.

S&P launches its own bonds


Maybe it’s because they had been burning too much midnight oil making sense of the implications of Russia’s aggression, but American rating agency S&P Global, launched a 5-part deal raising $5.5bn. In reality it was because S&P wanted to rearrange its balance sheet. S&P Global issued 5,7,10, 30 and 40-year bonds to help repay existing shorter dated, higher coupon notes, which are being tendered for, the longest of which has a maturity date in 2025. Moody’s and Fitch rate S&P at A3/A- both stable. All the new traches are trading much tighter since lunch.


Regards


Trevor Cooper FCISI

Chief Executive Officer

Chief Investment Officer

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