Bond Market Insights - Wed, April 6 2022

Ignoring better than expected service sector data in both the US and Europe, markets were led by the hawkish U-turn from Fed Governor Lael Brainard. He spoke of shrinking the balance sheet at a rapid pace and the Fed being prepared to take "stronger action". George stated 50bps is an option they have to consider.


US Treasuries sold off aggressively led by the belly of the curve and EGBs also weakened, led by Italy which closed as much as 19bps wider to core. Markets were also weighed down by escalating tensions; EU member states expelling Russian diplomats, proposing a ban on Russian coal imports and also suggesting a ban on Russian and Belarusian-operated trucks and vessels from EU ports.


The FOMC minutes for the March 15th – 16th meeting is the focus today. Powell said at the press conference that “we made excellent progress on a plan”, so the market hopes for firmer guidelines around reducing the balance sheet. Powell’s guidance so far has been that the shrinking of the SOMA portfolio will be faster than before. SOMA is now more than twice as large as it was going into the roll-off in 2017.


Powell said what they had in mind would be equivalent to another quarter-point hike in the Fed funds target rate. Former Chair Yellen delivered a speech in 2017 that said she thought the roll-off plan could raise the 10-year Treasury yield by “about 15 basis points” and that this would be equivalent to “two 25 basis point hikes in the federal funds rate.” Over the first year of roll-off in late 2017 to late 2018, the US 10s yield rose by about 100bps following a similar rise in 2016. On rates 50bps seems to be in the bag for May and the dot plot had indicated getting up to a policy rate of 2% by year-end.


Asia was subdued yesterday with HK on holiday. The agencies inked a few changes in China real estate credit ratings. Central China Real Estate (CENCHI) was downgraded by Moody’s to B3/Caa1 with a negative outlook while Country Garden (COGARD ) was affirmed at BBB- by Fitch. CENCHI 7.75 5/24 yields around 52%, COGARD 8 01/24 yields around 15%.


This morning there is still buying interest for HY China property with bids showing in Kaisa Group, up around 5 points, Yuzhou, Redsun, Shimao and even for Evergrande’s subsidiary Scenery Journey, which is being bid around 11 cents on the dollar. Most of the demand is from funds and trading accounts. Powerlong is the big performer, powering up 6 points on the day.. Tsinghua Unicorn rallied about a point where it ran into selling from private banks and local funds.


China IG credit spreads are outperforming equities today, where HSTECH is down 3%. Spreads are about 1-4bp tighter, led by front end SOEs. Flow has been light with a slight tilt toward buying. Macau gaming names such as MGM China and Melco Resorts are in demand, countering some selling of Wynn Macau overnight.


Asia sovereigns are lower, but spreads are tighter due to the UST moves. Most of the buying has been in the long-end of INDON and PHILIP, Indonesia Quasi's PERTIJ and PLNIJ (PT Pertamina and Perusahaan Perseroan) still found s.upport reasonable support, tightening 8bps as real money bought.


Frontiers are under pressure again. Sri Lanka is down 2 points on the day,, at around 40.00 in longer bonds, as the country faces its worst economic and social crisis in recent times. Food, fuel, power and gas shortages coupled with high inflation (reported locally as 50%) and depleted foreign exchange reserves have led to mass protests and the resignation of public officials. Real Money was selling overnight and was joined by private bank selling in the Asia morning session.


US treasuries are closing in Asia with 10yr yields another 8bps higher. Aussie and Kiwi bonds got hit by 8bps and 17bps respectively first thing and Euro-govvies have followed suit, German bund yields higher by 4bps. Buyers of US 10yrs have emerged in quite good size at these levels, so going into the excitement of the New York session well supported.