Updated: Apr 1
Tuesday reversed some of the 4-day gains for China HY, down 3pts on average, on profit-taking from real money and trading accounts. There was selling of benchmark names like KWG (B+), China SCE (B2), Times China (B+), Sunac (BB-) and Yuzhou (B-). Shimao (just downgraded to BB+ by S&P), Country Garden (BBB-), CIFI Holdings and Logan Properties (BB-) saw more 2-way interest. At the distressed level Kaisa was bought while there was selling of Evergrande, Fantasia and China Fortune. Buying tended to be from real money. This morning the property sector has continued to slide as S&P cut China Aoyuan from single B to CCC. Bonds are down by as much as 3 points again. The China industrial sector has held in well over the past few sessions with buying evident in Fosun, China Hongqiao and China Aircraft Leasing.
China IG was 5bps tighter. Chinese onshore accounts are looking for short end bonds, while global players were nett buyers of 10yr. Lifers were adding 30 year bonds after the rates move on Monday night. China Huarong rallied 1pt after news that CBIRC had authorised a bond sale of up to CNY70bn.
The calendar for Asian new issues is strong. Yesterday saw DBS Group bring a two-tranche 3yr deal. $700mm fixed and $300mm floating, both at +30 over the relative benchmarks. Although priced over the 3yr, in secondary the fixed DBSSP 1.169 11/22/24 is traded over the 2yr where the issue spread was T2+65. This morning it has tightened 4bps on the bid. Standard Chartered PLC issued a two tranche 4yr with a 3yr call deal, the fixed $1bn part was priced at T3+95, the floating at the $500mm floating at SOFR+93.
U.S. economic releases last night highlight the extent to which current inflation pressure are not just supply-driven but also the result of strengthening demand. Total Retail Sales surging to record highs in October with most of the spending and output attributed to the goods producing sectors rather than services. This is significant as one of the arguments for inflation being transitory rests on goods spending declining as service consumption normalizes, taking the pressure off of supply chains. Spending on goods is now 23% above its pre-pandemic level while industrial production is just 0.3% higher than its comparable amount.
There are also signs that some U.S. supply-chain issues are beginning to ease. October saw an 11% surge in automobile production, something that would not have been possible without increased supply of microchips. Mining output, which includes energy, rebounded 4.1%. U.S. crude oil and natural gas production is now at its highest levels since 2014.
The weakness in Treasury prices was relatively contained yesterday as dealers nervously await today’s 20-year bond auction, coming in the shadow of the poor 30yr last week. As for equities Bank of America’s November Fund Manager Survey Tuesday showed the biggest overweight in U.S. equities since 2013. Fund managers in the survey increased their allocation to U.S. equities by 13% m/m to 29% overweight while speculative leveraged long positions are reported to be relatively modest. Short-term trading indicators on the S&P 500 are somewhat overbought but otherwise momentum extremes are not apparent so it looks like the rally can continue.
As we approach year end there is more banter about the scarcity of collateral in the form of high quality liquid assets (HQLA). Anticipate this to support short to medium maturity securities.
President Biden suggested last night that he will announce his decision on the next Fed Chair over the coming weekend. Ms Brainard seems to have caught up with Mr Powell in the popularity stakes, with the candidates on equal pegging according to the bookies. Who will the odds favour?
Today is full of inflation data in Europe. The only shock would be if it was NOT higher than even expected. In the US we have the words of 7 Fed speaker to paw through.