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Bond Market Insights - 05 Jan 2024

The New Year sell-off continued Thursday with supply weighing on the market. Data also failed to support the case for 1H2024 rate cuts. Bunds had sold off in London on higher than expected PMI’s. US treasuries followed and took another leg lower as labour market data disappointed. ADP Employment Change was a surprise at 164k vs expectations of 125k. Initial jobless claims were down to 202,000, the lowest since mid-October. All eyes on payrolls this evening.


Odds of a March rate cut are down to 63% vs an 80% chance at the start of the week. Under 60bps are priced in by the June meeting, down from 75bps. Dec 2024 futures are back to 3.96%, indicating less than 140bps of rate cuts this year.


The minutes of the Dec. 12-13 FOMC meeting conveyed a growing consensus that inflation is effectively managed, accompanied by rising concerns about the potential adverse impact of a tight monetary policy on the economy. Nevertheless, most participants believed that the current monetary policy was achieving its intended outcome by curbing household and business spending. Elsewhere St. Louis Fed announced that Alberto Musalem, an economist and former NY Fed official, would step in to replace the hawkish James Bullard. Musalem in an industry veteran, having previously worked with Paul Tudor Jones and having founded his own quant tech firm.


Japanese banks have been changing their BOJ forecasts following the series of Earthquake which have blighted the Sea of Japan coast. MUFG is looking for no change in policy until April, as is Daiwa, which coincides with the spring shunto wage negotiations. Mizuho is doubtful of any hikes in H1. JPY has come of its highs. Analysts point out that the post 2011 earthquake JPY rally was due to trade surpluses, which resulted in good corporate demand. Today Japan runs trade deficits, so the tone remains weak.


In China, Fitch downgraded all four Chinese state-owned AMCs by one notch: Cinda (CCAMCL) was downgraded to A- with a stable outlook. Huarong (HRINTH) was downgraded to BBB, Orient AM (ORIEAS) to A- and Great Wall (GRWALL) to BBB, all 3 remaining on negative outlook. The moves reflect Fitch’s view that the government’s propensity to provide timely and extraordinary support has weakened dude to the financial underperformance and capital constraints of some AMCs.

The market is treating AMCs as being well supported by the government, particularly HRINTH which has had a strong buy back calendar. CCAMCL and Orient widened 3-4 basis points as a result, while Great Wall and Huarong saw little movement.

China IG bonds have tightened 3-5 basis points over the past week, with buying evident at the longer end. AT1’s are trading between 5.6% to 5.7%.


Over the past few sessions ETF redemptions have been weighing on the EM sovereign markets. The year started with new supply from Mexico (Baa2/BBB-) who launched their largest deal so far, a 3-tranche deal spread over 5yr, 12yr and 30yrs totalling $7.5bn. This hit LATAM spreads which had a knock-on effect on Asia EM. Indonesia further weighed on the sector, issuing a 3-tranche deal on Wednesday, all of which are trading below reoffer. They fell as much 0.75 pt yesterday with little demand outside local accounts buying and internationals switching out of existing issues. In secondary there was selling of 10yr -30yr INDON and PHILIP, which widened 7-8bps.


2024 is Global Election Year. Asia is no exception. The first half of 2024 brings:

-Jan 13, Taiwan: President/VP, Legislative Yuan

-Feb 14, Indonesia: President/VP, People's Consultative Assembly, local legislative bodies

-Apr/May, India: Lok Sabha (general elections)

-Apr 10, South Korea: National Assembly


Best wishes for 2024

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