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Bond Market Insights - Fri, 15 Sept 2023

Choppy price action in USTs through the ECB rate decision and US data. ECB went the ‘dovish hike’ rout as they delivered a 10th consecutive rate hike lifting overnight rates to 4.0%, while growth projections were revised lower, 2024 revised to 1.0% from 1.5%. Bunds and USTs bounced on speculation that this will be the final ECB rate hike in this cycle. The rally stalled as both the Aug Retail & PPI data topped estimates while weekly jobless claims continued to languish, with downward revisions to the June/July retail sales.

2yr UST yields are back above 5% with 5yr around 4.415% and 10’s 4.285%. 30y yields almost touched 4.40%. Oil was up another 1.9% and the US Dollar index, BBDXY, went out strongly at 1254, pushing the EUR to a 6month low at 1.064. Stocks remained buoyant as investors speculate peak rates and soft-landing scenarios.

PBoC recently cut the reserve requirement (RRR) by 25bps effective today, potentially releasing around RMB 550bn in liquidity, further countering the liquidity tightening since mid-August. August Retail sales proved robust, growing by 4.6% vs expectations of 3%. Industrial Production grew by 4.5% vs a 3.9% forecast. Fixed asset investment grew less than expected, 3.2% y/y, which was less than July. This was dragged down by real estate and infrastructure, but supported a pick up in the manufacturing sector. The fastest growing sector of retail sales was cosmetics, which boomed 9.7% in August; looking good is feeling good.

The China property sector continues to disappoint. Moody’s changed the outlook on China’s property market from “stable” to “negative” yesterday , expecting contract sales to reduce by 5% in the next 6-12 months. Sino-Ocean suspended all offshore debt payments while Country Garden delayed the yuan bond extensions vote to Monday.

The group that holds 10% of Greenland’s oversea debt is opposed to further extension of their bonds, and the bond holders are concerned about the risks of signing a bundled restructuring plan. Trading of US GRNLGR 5.9 02/12/25 was suspended yesterday according to a filing at HKEx due to the company’s failure to pay coupon as scheduled. The last day of the 30-day grace period was on Sept 11.

CIFI’s offshore debt restructuring plan so far has a maximum extension period of 9 years. They have also introduced options like reduced principal and convertibility to stock. A work in progress.

China August home have not helped this picture with prices falling 0.29% m/m in August, a faster rate than in July.

New issues in Asia have seen good demand, with little flow coming back into the market as the bonds start to trade secondary. Nissan secured 10x books and rallied another 30bp in secondary. Korea Southern Power books also 7x covered, Santos 5x, Bangkok Bank 3x, and Kexim 3x.

Softbank scored a success with the ARM IPO. The rating agencies have been busy updating macro and defaults forecasts and to a lesser extent ratings with Moody’s belatedly dropping China Property back to negative outlook and junking Weifang, the latest LGFV and APAC’s #6 Fallen Angel for 2023 vs 10-20 annually during covid. Global default rates are below what consensus this year. Moody’s are now forecasting APAC HY default rates to drop from 11.7% to 4.9%. HY default rates are at 5.9% in US and 3.9% Europe.


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