Bond Market Insights - Fri, 9 Sept 2022

Central banks look to continue their battle against inflation, which is creating volatility in markets. As expected, the ECB lifted rates 75bp as it plays catch-up. The ECB’s president, Lagarde, indicated there are likely to be ‘several’ more hikes, which was clarified as three to five further rate hikes. The expectation is for the ECB to lift rates a further 75bp in October. Markets also expect a similar sized rate increase from the US Federal Reserve, a view reinforced by Chicago Fed’s president, Charles Evans. Powell affirmed the Fed will continue tightening to subdue inflation which sent short end yields higher.


China just released CPI (2.5%), and PPI (2.3%). MacroHive points out that PPI has slipped below the CPI. At the start of the year PPI was still at 13%. This is a rather negative signal for the economy, as the PPI has historically been a very relevant indicator for domestic activity. If China abolishes the zero covid policy CPI would rise, after being dormant all year. PBOC would be force to consider raising rates.


IG high beta was 2-3bp tighter on Thursday morning. SOEs continue to grind in. Sinopec was 5bp tighter and CNAK HK only -3bps. Non China IG firm opened firm with Japan new issues outperforming. Mizuho tightened -5bp,MUFG 4bps and Nornchukin a whopping -20bp. Profit taking in TSMC pushed the 10yr 2bps wider.


In High Yield Country Garden and CIFI rallied 2pts on real money buying, Agile, Central China, Greenland, Roadking etc were dragged up in their wake. Macau Gaming were as much as 4pts higher initially on short covering, but gave back half of this by the days end.. The best performers were Wynn Macau and Sands China.


Vultures are circling over Evergrande and picking at the corpse. Its Hong Kong headquarters was seized yesterday by a group of lenders led by China Citic Bank, the HK subsidiary of the Chinese state-owned bank. Evergrande had been trying to sell China Evergrande Centre in Wan Chai after state-owned Yuexiu Property pulled out of a potential $1.7 billion deal last October. Li Ka-shing’s CK Asset was one of several bidders for the property in July, but Evergrande deemed bids lower than HK$10bn as too low. Evergrande debt is priced at around 7.5 cents in the dollar.


Barclays notes that KWG’s bond exchange plan looks more generous than it peers, but points to the risks of a second extension cannot be ignored. KWG has pledged proceeds from the Ap Lei Chau project, owned by a joint venture with Logan Properties, which might be the only funding source and could prove insufficient. If the plan is passed longer dated bonds could benefit from improved operating cash flow over the next year.


The main foci for China developers’ 1H22 results were liquidity, cash burn, and repayments, Privately owned developers generally recorded large financing cash outflows, while SOEs showed more resilient credit metrics despite mixed EBITDA and margins. Positive surprises included CIFI and Country Garden, which reported positive operating cash flow despite the challenging environment.


Barclays also notes that a few developers announced plans to issue state-backed guaranteed onshore MTNs, as well as other financing options, such as liquidity support from SOE banks. This expanded scope of funding support, progress on debt plans and creditor talks could lead to a reassessment of the sector’s bond prices.


China has just released CPI (2.5%) and PPI (2.3%). MacroHive notes the slide of PPI below CPI. At the start of the year PPI was at 13%. Its fall has been swift. This is a negative for the economy, as the PPI has historically been a very relevant indicator for domestic activity. When China exits its Zero-covid policy CPI would start to wake up from its slumber. PBOC would have to consider hiking rates.