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Bond Market Insights - Fri, 30 Sept 2022

Thursday was a weak session for Asia Financials, spreads 5-20bps wider with AT1 down 50c-1pt. Client feedback is that dealers are pulling back from providing liquidity, exacerbating any price action into quarter-end. There is still buying of the front-end of Korea and India. China AT1 continues to trend lower, ICBCAS 3.2 Perp and CINDBK 4.8 Perp were down 1pt. China TMT saw some two-way flows with bank books buying while real money selling. The buying of China SOE paper is slowing given the holidays next week.

China HY ended soggy with much of the CIFI Holdings and Country Garden curves trading with a 20 handle, the only buyers covering shorts. Much of the sector was down 3pts as was Macau gaming until a quick rally brought it back to unchanged.

IG EM Sovereigns gapped up around 3pts initially, although PHILIP 3.2 07/06/46 managed to squeeze 5pts, fuelled by momentum traders and a bit of residual buying from the overnight activity. The reversal was speedy, following UST’s lower. closing anywhere from up +0.75pt to down -0.50pt and the market was characterized by wider bid-offers spreads. This morning there is some buying interest from pension funds and real money. ETF and Lifers are still better sellers. The Corporate market is lacklustre with China IG opening as much as 5bps wider with down prints focused on 10yr and AT1’s.

Mongolia bonds moved lower this morning on capital control headlines. Local banks are restricting the amount of foreign currency customers can buy. Commercial banks daily limits are down to $300 equivalent per day. MONGOL bonds are down 4 points.

Hawks abound in Central Banking circles now. Fed's Daly says doing too little could mean harsher measures later and that projected rate hikes are necessary and appropriate. Mester says her path is higher than the median path as rates are still not in restrictive territory. In Europe ECB's Simkus opined that 50bps is minimum for October and his choice would be a 75bp hike, "100bp hike would be too much now". He is still cagey about starting to reduce the balance sheet. Britain’s Pill is looking for a “significant and necessary policy response” in November, but is showing a reluctance for an inter-meeting hike.

The Fed minutes showed an optimistic forecast for inflation, everything getting back to sub-3% in a couple of years’ time, but what if we are stuck with higher rates for longer? How will leveraged firms be able to adjust to a higher for longer rates environment, particularly in an era of tepid or even negative growth. Interest coverage ratios will likely revert to levels last seen in the mid 1990’s. GS points out that US high yield issuers had a field day in 2020 and 2021, which pushed the share of bonds maturing in 2yrs to its lowest level for 15 years. But a lot of the capital raised went towards higher dividend pay-outs and share buybacks, limiting the ability to postpone a visit primary market again. Asian HY issuers have not had the luxury of the US issuance window, so will have a rougher ride.


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