Rising US junk bond yields lure investors as fears of severe recession ebb

April 27 (Reuters) – A segment of US junk-grade bonds yielded the highest returns so far this year in a sign that Wall Street is more willing to take on riskier investments with higher returns, as fears of a severe economic downturn abate.

Returns on CCC-rated debt jumped to more than 6% so far this year from a 16.3% tumble last year, according to data from Morningstar Direct. Although the bonds with that rating are considered to be among the riskiest, their returns were the best across all rated categories this year.

Credit rating agency Fitch says CCC denotes a very low margin for safety and a high level of default risk.

Investors turned to such risky bets in their quest for higher returns as they hoped for a milder recession, if there was one, better-than-feared corporate earnings and a limited fallout from the failure of two large regional banks.

“CCCs have been the strongest performing segment in fixed income,” said Manuel Hayes, senior portfolio manager at Insight Investment.

Bonds rated B and BB followed closely, with returns of 4.1% and 3.7% so far this year. Their performance was still better than those rated investment grade, according to Morningstar data.

Although rated junk, B and BB are considered less risky than CCC.

In other signs that the market tempered some of the risks expected earlier, the option-adjusted spread (OAS) on the ICE BofA US High Yield Index, a commonly used benchmark for the junk bond market, ticked down to 463 bps on April 26 from 522 bps a month back, according to Refinitiv.

To be sure, downgrades and defaults may increase if borrowing costs become prohibitive for poorly rated companies dependent on the ability to issue new debt and refinance existing debt cheaply, said Jeremy Wager-Smith, fixed income portfolio associate at San Francisco-based wealth and investment management firm Bailard.

He expects CCC spreads to widen as corporate fundamentals and earnings deteriorate among vulnerable issuers.

Still, some analysts believe that strong fundamentals of most corporate issuers will lead to increased downgrades rather than high levels of defaults in the event of a recession.

“From a credit selection perspective, we still think it makes sense to focus on strong companies and defensive sectors, whether in investment grade or high yield,” said Bishop Jordan, senior credit analyst at Eagle Asset Management.

Investment grade debt on the Federal Reserve Bank of New York’s corporate bond distress index (CMDI) showed more stress than their high-yield counterparts during most of the past year as the Fed delivered the fastest pace of interest rate hikes in decades.

The CMDI was launched last year, with historical data from 2005. It is designed to help identify signs of market distress and is keenly watched by investors.

(Reporting by Mehnaz Yasmin in Bengaluru; Editing by Alden Bentley and Anil D’Silva)

China’s small steps on offshore use of yuan are starting to add up

SINGAPORE, April 27 (Reuters) – China’s yuan currency is slowly but surely being adopted for more international payments, which analysts say could lay the foundations for a trade system running parallel to the dominant US dollar.

In the past day alone, data showed that more cross-border transactions with China were settled in yuan in March than in dollars for the first time and that Argentina said it aims to regularly pay for Chinese goods in yuan and not dollars.

While the dollar dominates world trade settlements, the news comes amid a steady drumbeat of more and more bilateral deals arranging yuan payments with China — from Chinese oil purchases in the Middle East to trade with partners from Brazil to Russia.

True global yuan adoption is unlikely, given expectations that Beijing will want to keep a tight grip on the currency. But incremental progress is already fashioning a new trade architecture and is gaining pace, particularly as Russia’s expulsion from much of the West’s payment systems has accelerated the development of alternatives.

“The world’s largest commodity exporters and importers – China, Russia, and Brazil – are now working together on using renminbi for cross-border payments,” said Chi Lo, senior investment strategist at BNP Paribas Asset Management in Hong Kong.

“Their cooperation could draw other countries to renminbi payments over time and cumulatively, this group could lift the renminbi at the expense of the dollar,” he said.

China has long sought to increase the yuan’s undersized 2.2% share of global payments, but seemingly without being willing to open its capital accounts and allow the sort of free-flowing movement that makes dollars, euros, and yen so convenient.

Russia’s war on Ukraine, and the resulting Western sanctions, have given substance to the push. Suddenly, Russia has come from virtually nowhere to become the fourth-largest yuan-trading hub outside China.

The yuan’s share of Russia’s currency market has leaped to 40% to 45%, from less than 1% at the start of last year. Its share of world trade financing, according to SWIFT, has increased to 4.5% in February from 1.3% two years ago. The dollar’s is 84%.

“It will not replace the US dollar globally, but it is already starting to replace the dollar in some of China’s trade relationships,” said Gerard DiPippo and Andrea Leonard Palazzi, economists at Washington’s Center for Strategic and International Studies, in an article last week.

“This kind of renminbi internationalization may achieve Beijing’s goals, including reducing China’s exposure to exchange rate fluctuations and mitigating China’s vulnerabilities to US financial sanctions.”

SLOW MOVING

World trade flows are dominated by dollars, euros, sterling, and yen because those currencies are freely available and connected to open economies in ways the capital-controlled yuan is not. To be sure, there are no signs that is changing.

“In most trades, importers have a comparative advantage in determining the terms of trades, such as pricing and settlement currency,” says Zhang Yu, chief macro analyst at Huachuang Securities in Beijing.

“Therefore, if exporters want to use yuan to settle trades, they must persuade foreign importers to pay in yuan, which often takes a long time.”

China itself needs time to create depth in a limited pool of yuan outside its shores, which is less easy for Beijing to control.

“For yuan usage to grow in scale it may take 10 years or longer,” says Andre Wheeler, chief executive of supply chain, trade risk consultancy Wheeler Management Consulting based in Australia.

“If they were to try to change Australia’s iron ore trades to be settled in yuan, I don’t think China would be able to cope with that scale.”

Yet the yuan offers other attractions to China’s trading partners. In Argentina’s case, buying goods in yuan saves draining dwindling dollar reserves. More broadly, each new adopter adds to a currency system’s depth and usefulness.

“One of the many reasons for using the dollar is what we call network effects,” said Michael Pettis, senior fellow at Carnegie China.

“The more of us that use it, the cheaper it becomes to use and the more efficient it becomes to use,” he said.

“By trying to force more and more of its trade into renminbi, Beijing is trying to create network effects that will make use of the renminbi for trade that much easier and with lower frictional costs.”

(Reporting by Tom Westbrook, additional reporting by Samuel Shen and Winni Zhou in Shanghai, Georgina Lee in Hong Kong; Editing by Vidya Ranganathan and Kim Coghill)

UK Stocks-Factors to watch on April 27

April 27 (Reuters) – Britain’s FTSE 100 .FTSE index is seen opening lower on Thursday with futures down 0.15%.

* LSEG: LSEG LSEG.L reaffirmed its annual forecast.

* Barclays: Barclays reported better than expected first-quarter profit.

* Unilever: Unilever ULVR.L smashed quarterly sales forecasts.

* AstraZeneca: AstraZeneca AZN.L beat expectations for its first-quarter profit and revenue, helped by sales of its roster of drugs in emerging markets.

* Sainsbury’s: Sainsbury’s <SBRY.L, Britain’s second-largest supermarket group, reported an expected 5% fall in annual profit.

* WPP: WPP WPP.L, the world’s largest advertising group, reported an underlying rise in first-quarter net sales.

* St James’s Place: British asset manager St James’s Place Plc SJP.L reported a rise in its funds under management at the end of the March quarter from the prior three months.

* Capricorn Energy : Capricorn Energy CNE.L plans $575 million in shareholder payouts over the next 12 months.

* Taylor Wimpey: British housebuilder Taylor Wimpey Plc TW.L said buyer interest has risen over the past few months, helped by an improvement in sales and mortgage rates, even as the group remained cautious over broader economic woes.

* Schroders: Schroders SDR.L said its Chief Financial Officer (CFO) Richard Keers will retire from his role and leave the company on Dec. 31.

* OIL: Oil prices rose slightly, finding some support after heavy losses in the previous two sessions.

* GOLD: Gold prices rose as a softer dollar rekindled some of bullion’s appeal for overseas buyers.

(Reporting by Sinchita Mitra in Bengaluru)

South Korean shares reverse 5-day slide, but mood remains shaky

SEOUL, April 27 (Reuters) – Round-up of South Korean financial markets:

** South Korean shares reversed early losses to end higher on Thursday, snapping a five-day losing streak, while trading sentiment appeared still shaky on concerns about the US banking sector and uncertainty in earnings reports.

** The benchmark KOSPI rose 10.98 points, or 0.44%, to close at 2,495.81, having fallen as much as 0.8% earlier in the day.

** Trading sentiment appeared still shaky, however, with the losing stocks outnumbering gainers by 468 to 407.

** Samsung Electronics Co Ltd, which is heavily weighted on KOSPI, ended 0.8% higher after it flagged a gradual recovery for chips in the second half of the year after its semiconductor division reported a record loss.

** The banking sector’s index slumped 1.2%, having fallen as much as 1.9% earlier in the session.

** Chipmaker SK Hynix gained 1.60%, while battery maker LG Energy Solution advanced 3.53%.

** Foreigners were net buyers of shares worth 283.0 billion won (USD 211.4 million).

** The won ended onshore trade at 1,338.0 per dollar, 0.13% lower than its previous close at 1,336.3.

** In offshore trading, the Korean won was quoted at 1,338.6 per dollar, down 0.0% on the day, while in non-deliverable forward trading its one-month contract was quoted at 1,336.8.

** Currency traders shrugged off remarks by a senior presidential official that US+. and South Korean leaders upgraded their commitment to cooperate on maintaining stability in foreign exchange markets at a summit.

** The KOSPI has risen 11.60% so far this year, and gained 4.4% in the previous 30 trading sessions.

** The won has lost 5.5% against the dollar so far this year.

** In money and debt markets, June futures on three-year treasury bonds KTBc1 fell 0.07 points to 104.93.

** The most liquid three-year Korean treasury bond yield rose by 2.9 basis points to 3.288%, while the benchmark 10-year yield rose by 3.1 basis points to 3.340%.

(Reporting by Choonsik Yoo; Editing by Varun H K)

Most Japanese stocks climb on manufacturer earnings; Nomura slides

TOKYO, April 27 (Reuters) – Most Japanese stocks rose on Thursday, led by manufacturers on earnings optimism while banking contagion concerns weighed down financials.

The Nikkei share index rose 0.15% to close at 28,457.68, recovering from an early 0.6% drop. The broader Topix added 0.43% to 2,032.51.

Heavy equipment maker Hitachi Construction Machinery Co 6505.T jumped 3.67% after saying full-year operating profit surged 45%. That contrasted with brokerage Nomura Holdings Inc, which sank 7.24% after posting a plunge in quarterly profit.

Chip-testing equipment maker Advantest Corp. sank more than 9.21%, its steepest drop in almost three years, after its earnings forecast missed market expectations.

“Hitachi Construction had punchy guidance,” said Mio Kato, founder of LightStream Research, who publishes on the Smartkarma platform. “I still think the theme for the year is a very weak tech space and an increasingly strong industrials space. So far, earnings are leaning in that direction in Japan.”

Nomura joined major Wall Street firms in reporting a business slump after the failure of two US. banks last month. US. stocks were mixed overnight, but the tech-heavy Nasdaq gauge gained following upbeat earnings from Microsoft Corp and Google operator Alphabet Inc.

Investors are awaiting US inflation data on Friday ahead of the Federal Reserve policy decision next week, while Japan’s central bank begins a two-day meeting on Thursday under new governor Kazuo Ueda.

The Nikkei share average had 152 gainers against 69 that declined.

Canon Inc surged 4.16% to its highest level since early December after the imaging giant lifted its profit forecast. Sony Corp jumped 3.54% ahead of results on Friday.

Toyota supplier Denso Corp 6902.T rose 3.44%, reversing an earlier skid, after a company executive said a chip shortage was likely to ease starting this summer.

Beverage maker Kirin Holdings slid 1.66% after saying it plans to acquire Australian natural health firm Blackmores Ltd for about 169.2 billion yen (USD 1.27 billion).

(Reporting by Rocky Swift; Editing by Rashmi Aich and Janane Venkatraman)

Australia’s sovereign wealth fund cuts cash holdings, buys stocks

By Lewis Jackson

SYDNEY, April 27 (Reuters) – Australia’s sovereign wealth fund cut exposure to cash and private equity and expanded positions in domestic and global equities in the March quarter, according to quarterly results published on Thursday.

Cash holdings at the A$200 billion ($132.48 billion) Future Fund fell to 10.6% in the first quarter from 11.8% a quarter earlier.

Developed market equities rose to 17% from 15.9% over the same period, while private equity dipped slightly to 16.4%, from 16.9%.

For the first time, the fund is also looking to buy small cap equities, Chief Executive Raphael Arndt said in a separate speech in Sydney the same day.

Set up in 2006 with the proceeds from the privatisation of the telecommunications network, the fund has delivered an average annual return of 9.1% over the past decade.

But future returns were likely to be “substantially” lower, said Chair Peter Costello in a statement accompanying the results.

The fund returned 1.1% in the twelve months to March, versus a 0.1% increase for the ASX/S&P 200 local benchmark and a 7.7% decline for the S&P 500.

Costello said that while some banks have paused interest rate hikes, “it is unlikely the cycle of rising rates to control inflation is finished.”

The Reserve Bank in April left rates on hold to wait and see the full effects of the preceding 10 consecutive hikes.

The fund flagged in December that it would raise its exposure to gold, commodities, private equity and infrastructure, warning the future will echo the low-growth, high-inflation era of the 1970s.

($1 = 1.5097 Australian dollars)

(Reporting by Lewis Jackson; Editing by Kim Coghill)

((lewis.jackson@thomsonreuters.com; Reuters Messaging: @lewjackk))

Oil prices find some support after heavy losses on US recession fears

SINGAPORE, April 27 (Reuters) – Oil prices rose slightly on Thursday, finding some support after heavy losses in the previous two sessions driven by fears of a US recession and an increase in Russian oil exports which dulled the impact of OPEC production cuts.

Brent crude was trading at USD 78.01 a barrel, up 32 cents, or 0.4% as of 0627 GMT, while US West Texas Intermediate crude CLc1 added 21 cents or 0.3% to trade at USD 74.51.

Oil prices dropped almost 4% on Wednesday, extending sharp losses from the previous session with recession fears overshadowing a bigger-than-expected fall in U.S. crude inventories.

As of Wednesday’s close, Brent is down 4.9% for the week while WTI has lost 4.6%.

“Crude prices remain heavy following the plunge below the USD 80 level as too much demand destruction hit the US. economic outlook,” said Edward Moya, an analyst at OANDA, adding that the OPEC was right to cut output earlier this month.

“Oil is trying to find a floor and the only thing that could provide some support is technical buying,” Moya said.

New orders for key US-manufactured capital goods fell more than expected in March and shipments declined, indicating that depressed business spending on equipment likely pulled back economic growth in the first quarter.

OPEC’s share of India’s oil imports fell at the fastest pace in 2022/23 to its lowest in at least 22 years as its intake of cheaper Russian oil surged, while China is also ramping up buying of Russia’s Urals oil.

Oil loading from Russia’s western ports in April will be the highest since 2019, above 2.4 million barrels per day, despite Moscow’s pledge to cut output.

(Additional reporting by Katya Golubkova; Editing by Christopher Cushing, Edwina Gibbs and Kim Coghill)

A heavy dose of tech, banks, and politics

April 27 (Reuters) – The top-tier Asian economic data cupboard on Thursday is bare, meaning regional markets will probably feed off US earnings, banking sector woes, debt ceiling developments, and geopolitical events for direction.

From a corporate perspective, Wall Street this week appears to have slipped into a ‘push and pull’ between upbeat results – especially mega tech – and deepening concern over the health of small and regional US banks.

Microsoft (MFST) and Alphabet (GOOGL) ‘beats’ on Tuesday helped push the Nasdaq up 0.5% on Wednesday but the Dow Jones and S&P 500 fell 0.7% and 0.4%, respectively. This was followed up on Wednesday by Meta (META), whose shares surged 12% after hours after the company’s strong earnings beat.

First Republic Bank’s (FRC) shares plunged to another record low, but PacWest Bancorp (PACW) jumped 8% after beating estimates and stemming deposit outflows. The regional banking index rose for the first day in five.

Avid readers of the geopolitical tea leaves in Asia will be kept busy after South Korea’s President Yoon Suk Yeol met US President Joe Biden in Washington, and China’s Xi Jinping held talks with Ukraine’s Volodymyr Zelenskiy – their first direct communication since Russia invaded Ukraine last year.

Biden said maintaining US access to Korean semiconductors is not designed to hurt China. Beijing may beg to differ and may be equally wary of Biden and Yoon’s pledge to deepen cooperation on deterrence against North Korea and strengthen trilateral ties with Japan.

Washington welcomed Xi’s call with Zelenskiy but may privately question Xi’s sincerity and motives reaching out to the Ukrainian leader 14 months after Russia’s invasion but only days after the furor sparked by China’s envoy to Paris.

On the macro front, Beijing will no doubt welcome news that the yuan became the most widely used currency for cross-border transactions in China in March, overtaking the dollar for the first time. The yuan was used in 48.4% of transactions, Reuters calculated, while the dollar’s share declined to 46.7%.

The ‘de-dollarization’ debate has picked up again recently, but the latest flows estimates from two Fed economists show central banks remain buyers of US Treasuries and added to their holdings in the first two months of the year.

China added to its Treasuries holdings in February, but not enough to make up for the fairly heavy selling in January.

Asian markets will also be sensitive to the US debt ceiling standoff. So far, stress has only flared up in the US T-bills market, but that could spread quickly if the Republican bill in the House is voted down later on Wednesday.

Here are three key developments that could provide more direction to markets on Thursday:

– Singapore unemployment (March)

– Australia export and import prices (Q1)

– China industrial profit (YTD)

(By Jamie McGeever; Editing by Josie Kao)

Gold pulls back after brief run to USD 2,000 on US banking woes

April 26 (Reuters) – Gold eased back on Wednesday as yields recovered with the focus returning to upcoming economic data, after briefly breaking above USD 2,000 spurred by fresh worries surrounding the US banking turmoil.

Spot gold fell 0.6% to USD 1,985.80 per ounce by 12:25 p.m. EDT (16:25 GMT) after jumping as high as USD 2,009.32 earlier. US gold futures slipped 0.4% to USD 1,996.20.

First Republic Bank’s (FRC) shares hit a record low after a report said the US government was unwilling to intervene in the rescue process for the troubled lender.

“That was the catalyst for gold prices to revisit slightly higher levels,” said Daniel Ghali, commodity strategist at TD Securities.

But overall, trend-following algorithms have effectively reached their maximum long positions, Ghali added.

Benchmark US Treasury yields recovered from a near two-week low, raising the opportunity cost of holding zero-yield bullion.

Gold declined despite the dollar shedding 0.4%, while investors also took stock of upbeat risk sentiment driven by strong earnings.

Traders were now focused on US quarterly GDP data due on Thursday, followed by the core personal consumption expenditures index on Friday, the Fed’s preferred inflation gauge.

Markets had priced in about a 3-in-4 chance of the US central bank raising rates by 25 basis points at its May 2-3 meeting.

Those odds were lower due to “resurgent fears that there’s always more than one cockroach when it comes to the US regional banking crisis,” Ghalli said.

Safe-haven gold scaled an over one-year peak at USD 2,048.71 mid-April as the US banking crisis unfolded.

“Retail, discretionary traders and the like remain very underexposed, a source of dry powder, especially if the market ramps up rate cut expectations,” said Paul Wong, market strategist at Sprott Asset Management.

Silver was down about 1% to USD 24.8 an ounce, platinum gained 0.2% to USD 1,088.50 and palladium rose 1.9% to USD 1,511.23.

(Reporting by Deep Vakil and Ashitha Shivaprasad in Bengaluru; editing by Jonathan Oatis)

Market calm invites risk of BOJ shock

TOKYO, April 26 (Reuters) – Investors have dialed down wagers on a policy shift at the Bank of Japan this week, which has opened a window of calm that ironically affords Governor Kazuo Ueda a chance to move quickly.

For months investors have been doubting policymakers’ assurances that the BOJ isn’t planning to change its ultra-easy settings yet, with speculation hitting a fever pitch in January after a sudden adjustment to BOJ yield targets late last year.

Ueda has given no clues a fresh move is imminent and accordingly pockets of dislocation in the bond market, where short-selling has focused, are easing, and traders are pushing back expectations for policy tweaks to June or July.

The gap between market-set 10-year interest rate swaps and 10-year government bond yields, which the BOJ caps, is at its narrowest in eight months and almost 40 basis points tighter than when it was at its widest in 25 years in January.

Dealers say BOJ efforts to make short selling more expensive have also worked and that investors are simply avoiding the market, rather than crowding into bets on yields rising.

Implied dollar/yen volatility in the currency options market is well below January highs too, suggesting forex traders aren’t expecting wild moves either.

The calm could be opportune for the BOJ.

“I’m thinking that the market is very under positioned (for a shift),” said James Malcolm, head of FX strategy at UBS in London, where the house view is for the BOJ to move in June or July, but he sees a risk policymakers take their chance to act.

“By process of elimination they have to adjust yield curve control before June-July (market) consensus,” he said, which could be by widening or moving the 10-year yield target band that currently keeps yields within 50 bps of zero percent.

Others believe yield targets could be abandoned altogether.

Sources familiar with BOJ thinking say such changes may be delayed, and instead, Ueda could adjust guidance on the outlook and drop references to COVID-19 shaping policy.

Nearly 90% of economists polled by Reuters said they expect no policy change. About 40% expect a change in June.

RETREAT

Inflation at 40-year highs and the biggest wage rises seen in decades are behind investors’ conviction that years of loose monetary policy must end soon for Japan.

And they have bet in defiance of BOJ rhetoric, a trade nicknamed the “widowmaker” for its propensity to fail. Wagers have centered around short selling the 10-year bonds that the central bank has kept artificially pricey by capping yields.

With the BOJ spending a staggering USD 1 trillion defending that cap in the year through to March, along with other measures to make shorting costlier, a lot of investors have given up.

Foreigners’ record weekly purchase of JGBs in the week after the March meeting was largely attributed to closing shorts.

The gap between futures’ implied yields and cash yields, which can blow out when futures are heavily shorted, has also narrowed.

“It seems many funds were forced to cover their short positions,” said Tomohiro Mikajiri, head of yen and non-yen fixed-income trading in Japan for Barclays. “Hedge funds which attacked the BOJ’s policy have retreated from the game.”

A rally in global bond markets has also helped make Japan’s low yields look slightly less out-of-step with the rest of the world. Ten-year cash yields were last at 0.455%, below the 0.5% cap, and 10-year interest rate swaps were at 0.64%.

Ueda’s most recent remarks have stressed the need to keep policy settings loose for now, without ruling out the possibility of future changes. On Sunday the Sankei newspaper reported the BOJ is considering a review of the impact of its policy settings, which could foreshadow changes.

Nomura strategist Naka Matsuzawa said the path ahead would be a balance between getting a policy change done and improving communication. Others remain wary of surprise.

“I don’t think Ueda’s words will necessarily match his actions,” said Brent Donnelly, currency trader and president of analytics firm Spectra Markets, who also noted the market is under-positioned for a move this time around.

“Remember they changed policy in December 2022 right on the heels of similar dovish comments from (former governor Haruhiko) Kuroda. If their strategy is to trick the market, like they did in December, they could move at this meeting.”

(Reporting by Junko Fujita and Tom Westbrook; Editing by Jacqueline Wong)

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