TREASURIES-Yields tick lower as data, Fed firm up 25 bp cut expectations

UNITED STATES - A mixed employment report on Friday morning and an even-keel message from U.S. Federal Reserve Chair Jerome Powell left yields modestly lower, firming up market expectations the central bank will cut interest rates by the expected 25 basis points at its September meeting.

The Fed will continue to act “as appropriate” to sustain an economic expansion now in its 11th year, Powell said Friday in Zurich, repeating a pledge that financial markets have taken to signal a further reduction in interest rates.

Treasury yields were modestly lower than where they had been going into the panel discussion, with the two-year yield down 1.6 basis points to 1.524% and the 10-year yield down 1.7 basis points to 1.548%. The Labor Department’s report earlier Friday showed job growth had slowed more than expected in August, but losses were cushioned by strong wage gains, which should support consumer spending and keep the economy expanding moderately amid rising threats from trade tensions.

The economy’s waning fortunes, underscored by an inversion of the U.S. Treasury yield curve, have been largely blamed on the White House’s year-long trade war with China. Washington and Beijing slapped fresh tariffs on each other’s exports on Sunday. While the two economic giants on Thursday agreed to hold high-level talks in early October in Washington, the uncertainty, which has eroded business confidence, lingers.

The jobs report is unlikely to change what the Fed does at its next monetary policy meeting. “The labor market continues to be the strongest point of data across the economic landscape, and that’s not what has been the catalyst for the Fed shifting to an easing bias,” added Merz.

Source: https://www.reuters.com/article/usa-bonds/treasuries-yields-tick-lower-as-data-fed-firm-up-25-bp-cut-expectations-idUSL2N25X0R8

With 49 Deals in 30 Hours, U.S. Corporate Bond Market Ignites

UNITED STATES - Companies are borrowing $74 billion in the U.S. investment-grade bond market this week, the most for any comparable period since records began in 1972. Since Tuesday, corporations including Coca-Cola Co., Walt Disney Co., and Apple Inc. have sold notes as yields have dropped.

And the frenzy isn’t letting up. At least another $50 billion is projected for the rest of the month, and the activity is spilling over to junk bonds and leveraged loans as well. With more than $16 trillion of bonds in Europe and Asia paying negative yields, investors worldwide are snatching up debt that offers relatively higher returns, keeping demand strong in the U.S.

For investment-grade companies, the average yield on bonds was 2.77% as of Wednesday, according to Bloomberg Barclays index data. In late November, that figure was above 4.3%. For a company selling $1 billion of debt, that amounts to $15.3 million of annual interest savings, before taxes. Junk-bond yields have dropped too, with notes rated in the BB tier, the uppermost high-yield levels, paying a near record-low 4.07%.

It’s not clear how long that will last -- on Thursday, U.S. Treasury yields surged, with the 10-year note jumping as much as 0.12 percentage point to 1.59%. But for now the bond sales are intense enough to make up for a year that had previously been lackluster. Investment-grade issuance is now down just about 2% from the same point last year. In June, the gap was closer to 13%.

The recent spate of issuance is the latest surge in corporate debt sales, as companies have ramped up their borrowings to buy back shares and invest in new projects. Investment-grade debt outstanding totaled $5.8 trillion on Wednesday, more than double the level a decade ago.

The underwriting fees that the sales are generating are one of the few positives for bank profits that are expected to get hit by falling rates. The refinancing can also translate into greater trading revenues, said Bloomberg Intelligence analyst Arnold Kakuda.

It’s a stunning turnaround from late last year, when Scott Minerd, Guggenheim Partners’ global chief investment officer, said a sell-off in General Electric Co. debt signaled that “the slide and collapse in investment grade credit has begun.” While the investment-grade market last year generated losses of 2.5%, this year it’s up 14.2% including both interest and price gains, making it one of the best-performing assets in fixed income.

In the leveraged loan market, 17 deals totaling more than $16 billion have launched this week, making it the busiest week since October. Investment-grade and high-yield bankers are telling clients that the good times may not last.

Source: https://www.bloomberg.com/news/articles/2019-09-05/with-49-deals-in-30-hours-u-s-corporate-bond-market-ignites

China’s Private Bond Defaults Climb to Record $4.4 Billion

CHINA - More Chinese companies are defaulting on private bonds this year as the slowing economy weighs on weaker companies and firms seek to repay publicly traded debt first.

The nation’s issuers have missed repayments on a record 31.8 billion yuan ($4.4 billion) of private bonds this year through August, compared with 26.7 billion yuan for all of 2017 and 2018 combined, according to data by China Chengxin International Credit Rating Co., one of China’s biggest rating firms.

HNA Group International, a unit of struggling private conglomerate HNA Group, honored a $300 million note due Aug. 18, after missing repayment on a 1.5 billion yuan private bond at the end of July. An HNA Group representative declined to comment on whether the private debt had been repaid when contacted by Bloomberg.Total corporate bond defaults in China year-to-date were at 78.4 billion yuan, up 51 % from the same period last year due to a slowing economy.

There are signs the defaults are weighing on demand for such notes. Issuance of privately-placed corporate notes in China declined in the four months through July, in the longest falling streak in over two years, before rising to around 160 billion yuan in August, according to bond issuance data compiled by Bloomberg.

Investors are also asking for higher risk premium on privately issued notes. The average coupon difference between new sales of private and public bonds was 154.2 basis points in January, the spread rose to 179.5 basis points at end-August, according to data compiled by Bloomberg.

The ratio of delinquency to total private notes outstanding was 0.63%, more than double a proportion of 0.26% in the public bond market, according to China Chengxin International Credit Rating data.

Source: https://www.bloomberg.com/news/articles/2019-09-04/china-s-private-bond-defaults-climb-to-record-4-4-billion