June 24, 2013 / 11:52 AM / 4 years ago

China stumbles cast shadow over US bond markets

June 24 (IFR) - Following both the equities rout and the interbank liquidity squeeze in China, the US high-grade market heads into Monday with global assets lower and Treasuries massively underperforming in heavy volume. The benchmark 10-year yield hit 2.65% this morning, its highest level since August 2011, laying the groundwork for another tenuous session in the US credit markets after three straight days without any deals.

The spike in interest rates and the overall volatile tone are likely to keep a lid on most new issuance again, even though there's at least a solid backlog of smaller trades waiting in the pipeline. Syndicate desks are expecting around USD10bn in volume this week, but that may prove to be optimistic given the current climate.

China's stocks lost 5%, their biggest intraday slide in nearly four years, on news that the PBOC refrained from injecting additional capital into the markets. Locally it was reported that five Chinese companies have also delayed or postponed deals. Meanwhile Dallas Fed President Fisher will speak on US monetary policy at 1pm, and his likely hawkish remarks could send the already jittery markets reeling. - Dow Futures: -153 S&P Futures: -18.75, Nasdaq Futures: -26.25 - CDX IG20: 5.5bp wider, CDX HY20: 1.25 point lower - 10-yr UST yield: 2.648%, +13.4bp; 30-yr UST yield: 3.641%, +7.7bp

USD HIGH-GRADE CALENDAR

Kookmin Bank, A1/A/A, has mandated Bank of America Merrill Lynch, Barclays, BNP Paribas, Credit Suisse, HSBC and Mizuho to arrange a series of fixed income investor meetings in Asia, Europe and the US.

Banco Nacional de Desenvolvimento Economico e Social, Baa2/BBB, is arranging fixed income investor meetings with scheduled stops in London, New York, Boston and Los Angeles thru coordinators Deutsche Bank, Itau BBA and JP Morgan.

Odebrecht Offshore Drilling Finance is marketing a USD benchmark 144A/Reg S senior secured amortizer maturing in 2022. The deal is expected to receive an investment-grade rating. HSBC, Itau and Morgan Stanley have been mandated as global coordinators, while BB Securities, BNP Paribas and Santander are bookrunners.

The Republic of Korea, Aa3/A+, has mandated joint leads Citigroup, Deutsche Bank, Goldman Sachs, HSBC, KDB and Woori Bank to arrange investor meetings, with a possible deal to follow.

Russian Agricultural Bank, a 100% state-owned Russian bank rated Baa1/BBB, has mandated JPM, RBS and VTB Capital to arrange a series of fixed-income investor meetings. An international bond issue may follow, subject to market conditions.

USD HIGH-YIELD CALENDAR

In the high-yield market, all eyes will be on the mega deal from pharmaceutical giant Valeant, which is attempting to sell USD3.225bn this week through a two-part offering to help fund its acquisition of Bausch & Lomb. If placed, it will be the third largest high-yield bond issue this year.

The deal, led by Goldman Sachs as lead left bookrunner, and JPMorgan, BofA Merrill, Barclays, Morgan Stanley and RBC joint bookrunners, will be split between two tranches of senior unsecured notes due 2021 and 2023, and will be callable after three and five years respectively.

The yield-to-worst on the Barclays High Yield Index moved out to 6.62% on Friday. The index is now 169bp wider than the alltime low of 4.95% on May 9.

OVERNIGHT HEADLINES

FED, CHINA CONCERNS PRESSURE SHARES, DOLLAR GAINS

Plans by the U.S. central bank to scale back its money printing combined with fears that China's policy may be tightening to lift the dollar on Monday, while bonds, shares and commodities extended last week's losses.

The Federal Reserve's signal that the era of cheap central bank money - which saw many assets hit record highs - was coming to an end has raised fears of prolonged market shakeout.

A warning from the People's Bank of China (PBOC) that local banks needed to do a better job of managing their cash and lending saw Chinese shares suffer their biggest daily loss in nearly four years. The PBOC has been allowing short term rates to rise steeply in a bid to pressure the bank's to end the funding of speculative investments, but its efforts have raised fears about the impact on China's already slowing growth rate.

GERMAN BUSINESS MOOD BRIGHTENS BUT RISKS ABOUND

German business morale edged up in June as exporters anticipated an upturn in fortunes, raising hopes that Europe's largest economy is putting recent weakness behind it - though a fragile global backdrop suggested the mood could darken. The Munich-based Ifo think-tank said on Monday its business climate index, based on a monthly survey of some 7,000 firms, climbed for a second month running to 105.9 from 105.7 in May, in line with the consensus forecast in a Reuters poll.

TENET HEALTHCARE TO BUY VANGUARD HEALTH FOR $4.3BN

U.S. hospital operator Tenet Healthcare Corp will buy smaller rival Vanguard Health Systems Inc for $4.3 billion including debt to expand into new geographies. The offer of $21 per share represents a premium of 70 percent to Vanguard's Friday close. Vanguard shares were up 66 percent at $20.51 in thin trading before the bell. The companies said the deal includes the assumption of $2.5 billion of debt. Tenet said it expects the deal to add to earnings in the first year and estimates annual savings of $100 million to $200 million.

VODAFONE AGREES $10BN KABEL DEUTSCHLAND DEAL

Vodafone has agreed to buy Germany's largest cable operator Kabel Deutschland for 7.7 billion euros ($10 billion), betting on TV and fixed-line services in its biggest deal since 2007. Announcing its second major acquisition for a European fixed-line network in 12 months, Vodafone said it would pay 87 euros ($110) per share for the group to enable it to offer more competitive packages with TV, fixed-line and broadband services to its mobile customers. The world's second-largest mobile operator, following up its acquisition of Cable & Wireless Worldwide, is however paying a rich price for the German firm and its 8.5 million homes.

AIG EXTENDS DEADLINE ON AIRCRAFT-LEASING UNIT PURCHASE

American International Group's unit extended the date for a Chinese consortium to get regulatory approvals to buy the airplane-leasing business till July 31. AIG announced the deal to sell International Lease Finance Corp (ILFC) last December for $4.8 billion to a consortium including New China Trust, one-fifth owned by Barclays Plc , China Aviation Industrial Fund and P3 Investments. Last month, the two sides agreed to extend the deadline for the deal's closing by a month, to mid-June.

GLOBAL MACRO

- Treasury bonds heavy under follow through selling overnight, belly leads way lower. Leveraged accounts actively sell, Asian accounts also sell front-end through 10s.

- The tactical bias is defensive and favors the selling of strength; look for a range of 2.64% to 2.54% in 10s

- Shanghai comp down 5.3% but holding 1949 from 4th Dec as funding crisis continues

- China central bank holds line on shadow banking as rates spike

- ECB/Buba Weidmann - ECB unlikely to launch unlimited bond purchases, don't count on low rates forever - Sueddeutsche Zeitung

- German Jun IFO Bus/clim 105.9 vs 105.7 prev, 105.9 exp

- Italy Jun consumer confidence 95.7 vs 85.9 prev, 86.3 exp

- EUR STOXX 50 down 1% after big losses in Asia especially China

- 10yr Spain hits 5.00% before improving and is actually tighter on the day

- European Credit Indices wider, iTraxx S-19 XOver moves 12.8bp higher to 513.5bp, Main climbs 5.3bp to 129.1bp

US DATA

08:30 CFNAI (May) (prev -0.53)

10:30 Dallas Fed Texas Mfg Survey (June) (prev -10.5)

EVENTS

11:00 Fed outright Treasury coupon purchase (03/31/2019 - 05/31/2020) ($3.00 - $3.75 bln)

13:00 FRB Dallas's Fisher (non-voter, hawk) on monetary policy and the economy; London)

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