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Bond Market Insights - Fri, 14 Apr 2023

Following inconclusive CPI data on Wednesday US producer prices was lower than expected, headline down 0.5%mom in March, while consensus looked for a flat print. Core was down 0.1%mom, consensus at +0.2%mom. Combined they point to a decline in the year-ended rate for core PCE deflator in March.

An early UST bid following weaker inflation data failed to hold ahead of the $18bn 30yr auction. Due to the sell off the auction went smoothly. Today is retail sales, let’s see how the consumer feels about things.

US banks begin the reporting season and it seems that everyone wants to see some sort of credit tightening or signs of distress. KRE US, the regional bank ETF, continues to consolidate at these lower levels.

Asia was slow yesterday. There was some short covering in the TMT sector, while the short end of the China SOE curve remains heavy, weighed on by banking books selling. Today India IG started 2-5bps tighter with good demand for the newer issues, RECLIN, POWFIN, UTCMIN and BHARTI. There was good demand from private banks and ETF’s. The Adani complex continues to make ground, up another 30 cents today.

Yesterday Sumitomo Mitsui Financial Group started marketing a JPY AT1 issue, in what may become the first such offering by a major international bank since the CS debacle.

China's Big Four, are also preparing to sell loss absorbing notes. They have typically relied on additional Tier-AT1’s and Tier 2’s, but will now issue a more senior type of TLAC bond that can also be used to meet regulatory requirements. These absorb losses after common equity and AT1 have been used up, in case of a risk event that threatens the operations of the lender. The banks want to raise CNY40bn ($5.8bn) as soon as June. BIS requires requirements are rising. Bail in instruments will have to cover at least 16% of risk-weighted assets by 1 January 2025 and will rise again to 18% by 2028.

Banking regulators came up with the concept of total loss-absorbing capacity (TLAC), bonds that can provide a “bail-in” for the bank when it is on the brink of failure. A “bail-in” essentially refers to a debt write-off or debt-to-equity conversion from bondholders, with the intention of buffering up the bank’s capital ratios. TLAC can be dated, with a minimum maturity of 5 years. Unlike AT1, coupons are not deferrable.


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