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Bond Market Insights - Friday, 17 Mar 2023

US treasuries bear flattened as equities rallied amid action taken to stabilize ailing banks. 2yr yields jumped to 4.20 vs overnight lows at 3.815 while 2s10s slid to -70 after steepening to -41 ahead of the overnight CS headlines. 10yr yields climbing to 3.577 which was over +20bps from the lows. The 39bp intraday trading range the 2yr note covered was the smallest of the week thus far (57bp Mon, 51bp Tues, and 81bp Wed).

Below is the price action is the 2yr note and the 2yr euro-schatz future.. What a week!

The market was hit after the Swiss National Bank extended a CHF50b lifeline to CS who announced a buy back CHF3b of its USD debt, but bounced in NY as domestic regional banks started to teeter again; First Republic Bank was in the crosshairs with shares sliding over 30%, back to Monday’s lows and -82% from last Weds close. The KRE Regional Bank Index was down 3.7% in the morning session as T2yr yields dipped back below 3.90. This reversed when WSJ reported JPM, MS, GS were among the big banks discussing a potential deal with First Republic Bank that could include a $25-$30bn capital infusion. The KRE index jumped to +5% supporting a broader equity rally.

Lagarde demonstrated the resolve a central banker needs in an inflation bubble (I don’t often extend compliments in that direction) as the ECB delivered a 50bp hike to 3%, without forward guidance, to provide maximum policy flexibility while promising liquidity support to the financial system if needed. Asked if she would consider slowing rate hikes due to financial instability, she gave a firm no. She noted price stability and financial stability are irrespective of each other, and that the ECB has tools to deal with each.

In Asia Frontiers have underperformed over the past couple of sessions, especially Pakistan which moved 2pts lower on Wednesday, taking it to even yield with Sri Lanka on concerns over a potential default. While the concerns are valid there is a possibility of an IMF deal being struck which should give Pakistan some breathing room and allow them to muddle through for the time being, Mongolia saw some RM selling and Sri Lanka some ETF selling, although prices held in.

Credit Suisse Senior Opco bonds traded higher after the tender announcement, with short dated bonds trading up 5-10 pts (top of the tender waterfall). Holdco debt was under pressure with both Seniors and AT1s down 5-10 pts. Despite the SNB providing CHF 50bn in liquidity, there is still much uncertainty around how the Holdco would be treated in a resolution and/or a forced merger and HF have been absorbing paper sold by investment grade investors.

Markets are in complete disarray, just look at 2yr treasuries or Schatz. The Xover in US was a much as 47bp tighter, the biggest fall in three months in early trading.

Asia CDS and Asia benchmarks have opened as much as 5bps better this morning, although with all that is going on in macro volumes remain low.

St Patrick’s Day is also Triple Witching Day with Futures and Options expiry across Europe/UK/US. May the force be with you!


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