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Bond Market Insights - Fri, 20 Jan 2023

Asia investment grade Credit was in demand yesterday ahead of CNY. Real money was buying subordinated debt; AT1, T2, perpetuals. IG SOE paper was tighter by 5bps. Names such as Xiaomi were up as much as 2 points in the long end.

Asia US$ sovereign bonds opened tentatively on profit taking after the US treasury rally. Local buyers of Philippine and Indonesia 10yr were joined by offshore Insurers pulling the market tighter. The day ended about 3bps tighter to US treasuries, with European sellers tempering the rise. Frontier markets were mixed. Pakistan continues to see small profit taking and was another 0.25-0.5pt lower, Sri Lanka was 1.5pts higher on restructuring talks, but then faded. Mongol is consolidating after the recent rally. The market is still supported by patient buyers of the new 28s and supply is quite hard to come by.

After the exuberance of Thursday this morning’s Asian market is opening unchanged, with a strong underlying sentiment.

Lagarde, President of the ECB, set a strident tone at Davos. When asked why the ECB is failing to convince the market that it is determined to raise interest rates further and quickly, she stated “I would advise market participants to revise their positions”. She added that the job market has never been as vibrant as it is now with unemployment low and participation rate high.

By the time the ECB Minutes were released, the market was close to pricing 50bp hikes at each of the next two ECB meetings.

The ECB's December minutes reinforced the hawkish message showing a consensus for rates to "rise significantly at a sustained pace", in contrast to the Bloomberg article calling for a dial back to 25bp.

This “stay the course” attitude was echoed by Fed’s Brainard, who said that time and resolve are needed to lower inflation to 2%. The final guidance from Boston Fed President Collins before the FOMC enters lockdown this Saturday clearly indicated that the baseline remains that the effective fed funds rate should settle slightly above 5.0%, implying three more 25bp rate rises. That is a view that most Fed speakers have articulated in recent weeks.

In LATAM Argentina is said to have purchased up to $175mm in 2029 and 2030 bonds as part of its $1bn on USD bond buybacks announced on Wednesday. JP Morgan doubts around the financing of this operation and doubts whether it will grant the country capital market access in the near term. The Argentina curve closed about 1.5pts lower yesterday.


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