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  • Writer's pictureTrevor Cooper FCISI

Naisbitt King Bond Market Commentary October 2023

Updated: Oct 25, 2023

  • Central banks pause interest rate rises

  • Treasury curve change

  • NatWest Ulster Bank tender offers

  • Rating upgrades

  • New issues

October 2023

September saw the U.S. Fed, Bank of England and Swiss National Bank all pause their interest rates. While the FOMC decision was of course widely expected, the BOE and SNB “on hold” decisions in Europe were not, and somewhat o

f a surprise. The world of interest rates seems to be on hold. But the world doesn’t always go according to plan. Anyone who’s traded or made forecasts for a living can testify to the fact that the “obvious” outcome isn’t always the one that you get.

Given the interest rate pause, which could signal an ending of the global tightening cycle, it might have been thought that the dovish slant would have resulted in a bond-market rally. However, the reverse has been the case. After the FOMC pause, yields on Treasury bonds have been pushing higher. Since its rate hold position on the 20th of last month the yield on the 10-year rose 20bps to 4.60% by the end of the month, the highest since 2007. The part of the U.S. curve with the highest yield remains the 2-year, where the yield popped up to a 17 year high of 5.17% before coming back to 5.05% by month end.

The performance of U.S. Treasuries is now down 1.2% so far this year and is now on track for an unprecedented third straight annual loss. Intermediate maturities are roughly flat on the year, while longer-dated Treasuries have lost as much as 6.6%.

The chart below shows the spectacular movement in the U.S. Treasury curve during September. The long end of the curve sold off dramat

ically as rates ‘higher for longer’ are begrudgingly priced in by traders. The 30-year tenor sold off most dramatically, falling in price by approximately 7.8%, or a 49bp move in just 1-month. The short end of the curve fared better, with yields rising 18bp on the 2 year bond and even falling 2bp on the 1 month bill. The cycle may be reaching it

s peak, but the curve still has a long way to move before normalising to be upward sloping.

Ulster Bank bond tenders

Ulster Bank starts a tender offer for any and all amoun

ts across three series of bonds, according to a filing. The perpetual notes concerned are a floating rate sterling note, a euro denominated 11.375% bond and a sterling 11.75% bond. The Irish bank also starts a consent solicitation to provide for the redemption of any bonds that are not purchased in the tender offer. Changes are due to the company’s phased withdrawal from the Republic of Ireland, and as the bonds are no longer needed for the company to meet its capital requirements.

In February 2021, NatWest Group announced a phased withdrawal of all banking activity and associated services within the Republic of Ireland. In May 2021, the business of Ulster Bank Limited in Northern Ireland was transferred to the parent National Westminster Bank as part of a court-approved Banking Business Transfer Scheme. Ulster Bank ceased its operations in the Republic of Ireland on 21st April 2023.

Rating upgrades

Allianz upgrade

Allianz SE, the owner of Pimco, has been upgraded by Moody’s. The German insurance company was upgraded to Aa2 from Aa3 with the outlook changed to stable from positive. Elsewhere Allianz SE is rated highly at AA/AA- both stable.

The upgrade came after the German financial regulator Bafin ended a probe on Allianz after the insurer addressed shortcomings in the IT sphere. The watchdog had demanded “significant improvements” in a comprehensive list of findings, including adjusting access of employees to certain IT application

s after a move to a new department or unit. Bafin also raised objections about the management of IT projects and the development of new applications. Allianz made amendments, avoiding the need to increase solvency capital.

Credit Suisse upgrade

At the end of August UBS Group announced its results for second-quarter 2023, including Credit Suisse's operations in the consolidated reporting for the first time, and disclosed details of the group's restructuring.

S&P raised it’s long-term issuer credit rating on Credit Suisse's operating companies to 'A+' from 'A'. S&P said “Following the announcement that UBS Group would integrate Credit Suisse, the main operating bank of the group that also holds most subsidiaries, we now see Credit Suisse's European and U.S. operating companies as core to UBS Group's operations and expect them to be supported in any foreseeable circumstances”. The outlooks on these entities are stable. Fitch also raised its rating on Credit Suisse to A+ but from a lower BBB+ level. Moody’s however has, at the moment, put it’s A3 rating on positive watch.

American automakers upgraded

Ford’s long-term issuer default rating was upgraded by Fitch, marking the automaker’s first step back toward investment grade status. The agency raised the company’s rating to BBB- from BB+ and changed its outlook to stable from positive. The upgrade comes after Ford raised its full year forecast in July. The car manufacturer now expects adjusted earnings before interest and taxes within a range of $11bn to $12bn on better-than-expected sales volume and vehicle pricing, up from an earlier projection of $9bn to $11bn. Moody’s still has a sub-investment level of Ba1, a level it was upgraded to from Ba2 in July.

Fitch also upgraded General Motors pushing their rati

ng to BBB, outlook stable, reflecting their view that the supply chain challenges and resulting production volatility of the past two years have largely abated. The move had been on the cards as the agency did have a positive outlook on its BBB- rating.

Country upgrades

The last business day of September saw several countries upgrades. Cyprus, Oman, and Portugal were all saw improvements with their credit ratings.

The Republic of Cyprus entered into investment grade territory with Moody’s for the first time in 12 years when they upped they ratings from Ba1 to Baa2 with a stable outlook. Moody’s said “Fiscal strength has also materially improved, and the economic and fiscal impact of the pandemic only temporarily interrupted the decline in the debt burden that Moody's expects to continue in the next few years”.

Oman's long-term foreign currency debt rating was upgraded by Fitch to BB+ from BB. The outlook was moved to stable from positive. The rati

ng agency announced that raising Oman's credit rating reflects the use of high oil revenues to repay debts, distribute their maturity period, and control spending to reduce external risks.

Fitch upgraded the Portuguese Republic to A- from BBB+ with a stable outlook. This is the first time that Fitch has giving a rating in the A range to the country. Fitch said the country’s debt ratio is on a “sharp downward trend”.

New issues

The dollar high yield primary market is still maintaining a high levels of issuance, despite data showing U.S. consumer confidence fell to a four month low, reviving thoughts that a recession could still occur. American and European borrowers continue to crowd into the primary market as fast as they can to get ahead of any further deterioration in the economy and rise in the cost of debt. The volume of issuance this year is running at 154% higher than 2022. September sales of investment grade dollar bonds, at just over $124bn, rebounded from last year’s volume of $78bn during

the same period. This brings the total to almost $1trn so far this year. The sterling primary market continues to see significant issuance.

BBVA SA was yet another European bank to issue a large dollar Additional Tier 1 contingent convertible perpetual bond. The Ba2/BB stable rated junior subordinated bond has a coupon of 9.375% and a call in March 2029. The bond continues to trade around the issue price.

DP World is one of the largest and most geographically diversified logistics, marine and container terminal operators in the world by capacity and throughput. The company is 100% owned by the Government of Dubai and rated Baa2/ BBB+. The debut benchmark $1.5bn U.S. dollar Green Sukuk transaction has a 10-year tenor. Since launch, the issue which obtained an orderbook of over 2- times, has maintained its issue spread of +119.80bps.

Returning to the market, for the first time in almost 3 years Gilead Sciences, the American biopharmaceutical research company, launched a two-part 10 and 30-year senior deal of $1bn each. Both deals proved very popular with investors with their orderbooks covered many times over. The 10-year was 3.7 times covered with the 30-year proving the most successful at 5.8 times. Gilead Sciences is rated A3/BBB+, stable/positive.

UBS Group sold its first bonds since the takeover of Credit Suisse in March. UBS Group sold 4.25, 6 and 11-year senior unsecured notes, raising a total of $4.5bn. The bond sale is the first from the holding company since the gov

ernment-orchestrated takeover of Credit Suisse back in March in which $17 billion of Credit Suisse Additional Tier 1 bonds were controversially wiped out. UBS also sold a $3 billion, three-part offering earlier this month through its London branch. The 2-year fixed, 2-year floating and 5-year fixed senior dollar bonds were all oversubscribed with the 5-year 2.4 times subscribed.

UBS is also now sounding out investors over the potential issuance of an AT1 note. The Swiss bank will have to be very careful with the wording of the trust deed to reassure investors that they would be prioritised over equity stakeholders, unlike the situation they faced with the Credit Suisse tier 1 bond annihilation.


Trevor Cooper FCISI

CIO Naisbitt King Asset Management

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