CAPITAL GOODS: SKF (SKFBSS Baa1/NR/BBB+): Consent Solicitation Aftermath
Feb-12 11:28
- SKF’s move last week to seek consent solicitation triggered further tightening, with the 31s almost 60bp tighter post announcement.
- SKF’s position is that no event of default occurred, and it described the solicitation as a “matter of prudence”.
- It’s an interesting case study in game theory; by seeking consent it has emboldened the view that the planned spinoff will allow bondholders to claim an event of default. This contrasts with Essity who consistently rejected claims and are headed to the courts.
- We have seen low probability of a successful argument for default here, with 22% of assets, 30% of sales and 13% of adjusted operating profit affected, against language of “substantial” looking ambiguous at best. If little harm is done it could be tough to argue through that ambiguity.
While an understandable motivation, it’s hard to view this as anything other than a misstep by SKF; they have offered 25c for a change that would take the bonds several points lower leaving bondholders with no incentive to accept.
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EURIBOR OPTIONS: Mid Curve Upside structures
Jan-13 11:27
- 0RG5 97.875/98.00/98.12c fly, bought for 1.75 in 4k.
- 0RG5 98.00/98.125/98.25c ladder, bought for 1 in 6k.
US 10YR FUTURE TECHS: (H5) Bearish Start To The Week
Jan-13 11:27
- RES 4: 111-20+ High 6 and the bull trigger
- RES 3: 110-25 High Dec 12
- RES 2: 109-28 50-day EMA
- RES 1: 108-26/109-06 20-day EMA / High Dec 31
- PRICE: 107-09 @ 11:08 GMT Jan 13
- SUP 1: 107-06 Intraday low
- SUP 2: 107-04 Low Apr 25 ‘24 and a key support
- SUP 3: 107-00 Round number support
- SUP 4: 106-11 2.00 proj of the Oct 1 - 14 - 16 price swing
The trend condition in Treasury futures is unchanged and remains bearish. Today’s bearish start to the week, has once again, confirmed a resumption of the downtrend. Sights are on 107-04 next, a Fibonacci projection. Note too that moving average studies remain in a bear-mode position highlighting a dominant downtrend. Key short-term resistance is seen at 108-26, the 20-day EMA.
STIR: Just One Fed Cut Seen This Year
Jan-13 11:26
- Fed Funds implied rates have continued to push higher overnight in an extension of the sell-off seen after Friday’s strong payrolls and U.Mich inflation expectations reports. A next cut has shifted from being considered around Jun-Jul meetings to not quite being fully priced for the year (admittedly 24.3bp).
- This week’s scheduled Fedspeak is much lighter after last week’s multiple mostly hawkish appearances, although with only Goolsbee speaking after payrolls.
- Next up sees Schmid (’25 voter) tomorrow before some focus on Kashkari (’26) and Williams (permanent) on Wed before the Fed’s blackout period starts on Friday midnight.
- Cumulative cuts from 4.33% effective: 0.5bp Jan, 4.5bp Mar, 8bp May, 15.5bp Jun, 17.5bp Jul and 24bp Dec.
- Recapping some of the analyst view changes since Friday’s payrolls report, ranked by a hawkish to dovish stance, all coming before this week’s inflation data:
- BofA: No longer calls for cuts. Base case for extended hold, risks for next move skewed toward a hike.
- RBC: Now see the Fed on hold at 4.25-4.5% throughout 2025.
- Barclays: Expect just one 25bp cut this year, in June, before going on a more extended hold. “We think that the FOMC will resume 25bp cuts in June 2026, when we expect it to be evident in the data that price pressures from anticipated tariffs are not fueling broader inflationary pressures. All told, we expect three 25bp cuts in 2026, timed at the final three SEP meetings. Compared to our prior baseline, this effectively shifts one 25bp cut from March 2025 to December 2026.”
- MUFG: Now see longer Fed pause with next cut in Jun and only two cuts in 2025, terminal rate lifted 25bps to 3.75-4%. They also see QT continuing for longer, eyeing updates in early summer.
- JPM: Now see next cut in June before final one in Sept.
- GS: Now sees 2 cuts (June and Dec) vs previously 3 cuts this year, but still see terminal of 3.5-3.75%.
- Citi: Now sees next cut in May vs Jan previously.
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