Bond Market Update: Rate Cut Expectations Drive Yields Lower
The movement in government bond yields this week has trended sharply lower, with rate futures assigning an 83% probability for a 25 basis point rate cut at the December 9-10 Fomc meeting. These expectations have gained consensus following statements from several Fed officials favoring further easing in response to a struggling labor market. Despite a noted degree of division among Fed board members creating uncertainty, share prices have recently shown increased confidence in a pre-Christmas rate cut.
This trend has positively impacted European governments, including Italy, where the Btp received a rating increase from Moody’s – an agency previously criticized for excessive downgrades and wich hadn’t revised Italy’s rating upwards since 2002. Consequently, the Btp/Bund spread on the ten-year curve stands at 72, with the Italian benchmark yielding 3.4%. Within the Eurozone, all countries remain within a 79 basis point spread of Slovakia (3.47%), the highest, while the EU average is 3.07%.Bulgaria, set to join the euro in january, currently has ten-year bonds denominated in euros quoted with yields around 3.5%.
Pressure on the Fed to lower rates has pushed 10-year Treasuries below the 4% yield mark, while the yield on the ten-year Gilt is at 4.46%.
New Government Issues Under the Lens
The week was relatively quiet for new issues, particularly for government investors, due to the “Thanks Giving” holiday in America.
Regarding Italian public debt, the BOT auction expiring on May 29, 2026 (Isin IT0005680639) placed €7.5 billion with a gross yield of 2.036%, equating to an issue price of 98.981.
A new bond emerged, denominated in euros for €1 billion for Costa rica. This operation confirms the favorable conditions for emerging issuers seeking financing on international markets, driven by a growing appetite for returns. The Central American state financed itself for the first time in euros, though it’s not a Eurobond as the issue occurred under domestic law, targeting also foreign investors via Global Depositary Notes (Isin XS3239964664 and XS3239964581). The coupon is fixed at 6.47% annual gross, paid semi-annually, with an issue price of 99.93. This emerging euro bond, rated BB by Fitch, expires November 21, 2030 – a five-year period.
South Africa intends to capitalize on this positive momentum with a new Eurobond in dollars, its first in a year, potentially reaching up to $2.7 billion.
Almost six years have passed since the issuance of the first “Titano Bond“, the San Marino state bond on international markets. The small republic of San Marino faced challenging financial times and the early impact of the pandemic.
European bond Market Update: Recent Issuances & Trends (November 29, 2023)
Here’s a roundup of recent bond issuances in the European market, as of November 29, 2023, compiled from market reports:
HSBC recently issued a senior bond due November 27, 2033, raising €1.25 billion with a coupon of 3.608% and priced at par (100). The bond, rated A-/A+ by rating agencies, saw a price increase of approximately thirty cents in the gray market. The ISIN is XS3239159034,with a minimum denomination of €100,000 in increments of €1,000. https://www.globalcapital.com/view/hsbc-prices-eur125bn-10yr-senior-bond/
Banca Transilvania successfully launched a €550 million Additional Tier 1 (AT1) bond in euros, exceeding initial demand of over €2.5 billion. The perpetual bond,dubbed EUR Benchmark Perpetual Non-Call 5.5 years, features a fixed rate until November 27, 2030, with a coupon set at 7.125% and priced at 100. The coupon will be reset every five years based on the five-year swap rate plus an initial margin. The bond is rated B1 by Standard & Poor’s. https://www.globalcapital.com/view/banca-transilvania-prices-eur550m-at1-bond/
DZ Bank issued a €300 million 6NC5 green bond, maturing on November 27, 2031, with a call option after five years. The bond was priced at MS+70 basis points, down from initial indications of MS+95 basis points, with orders exceeding €800 million. It offers an annual gross coupon of 3.129% and carries ratings of A3/A/AA. https://www.globalcapital.com/view/dz-bank-prices-eur300m-green-bond/
Landesbank hessen-Thuringen girozentrale placed a €500 million bond with an eight-year maturity, yielding +90 basis points over the midswap rate (down from initial guidance of MS+115). The bond offers a gross annual coupon of 3.50% and received orders of €800 million. It is indeed rated A1/A+. https://www.globalcapital.com/view/landesbank-hessen-thuringen-prices-eur500m-bond/
Danske Bank is currently placing an 8NC7 Green Non-Preferred Senior Bond, maturing on December 2, 2033, with a call option in the seventh year. Initial yield indications are +115 basis points above the midswap rate. The minimum lot size is €100,000, in increments of €1,000. The bond is rated Baa1/A-/A+. https://www.globalcapital.com/view/danske-bank-announces-green-non-preferred-bond-placement/
Reported by Carlo Aloisio, Senior Bond Broker
Disclaimer: I have updated the information based on current data available as of November 29, 2023, and corrected any inaccuracies present in the original text. Bond yields and pricing are subject to change.