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Bond Market Insights - Friday, 21 July 2023

A moment for contemplation. Spiking US treasury yields, 10yr up 10bps, NFLX and TSLA crashing around 10%, S&P only down 0.7%. Nasdaq 100 fell 2% after tech earnings varied from bad to unimpressive. This year S&P 500 has risen 18%, and the Nasdaq 100 up 41%, large money managers are hitting limits on how much they can invest in tech stocks in what is a massive concentration risk. What is going to disrupt this ripper of a ride?


The front-end led the move lower initially as fresh data emerged, 2yr yields peaking at 4.88%. 10yr then selling off as the $17bn TIPS auction neared, 2s10s pulling back from inverted -105 to -98. The 5yr has outperformed in recent sessions and was the worst performer over night. The 10yr TIPs auction saw huge demand, stopping nearly 6bps through the curve (1.495%) with non-dealers taking a record 98.5% of the issue and indirect bidders, commonly foreign entities that purchase through primary dealers, took a record 85.8%


TIPS are Treasury Inflation-Protected Securities, the coupon is fixed at time of issuance and the principal amount is increased, or decreased, to adjust for inflation (CPI). Since the interest rate is calculated on the principal amount the coupon will be adjusted as well.


The market remains fully priced for a rate hike in US next week with the focus shifting to guidance. A higher for longer message could emerge from FOMC, terminal rates firming to 5.43% for November.


In Europe consensus is for a 25bp hike in the deposit rate to 3.75% by the ECB next week. A further hike to 4.00% in September is possible as the ECB does not want September to be seen as a turning point in the policy cycle. The “higher and longer” mantra is still in the air.


Asia IG primary has been dominated by Korean issuers this week. Mirae Asset Securities, DAESEC 6 ⅞ 07/26/26, has been the best performer. It was launched at T2+232 and has traded as tight as T2+193, 39bps tighter. Korean institutions and private banks have been busy adding to their allocations. Overnight a new deal for another Korean name, Hanwha Q CELLS Americas Holdings, held in well. $400mm HWQCUS 5 07/27/28 was issued at T5+105, and is currently about 6bps tighter.


Data wise today, Japan’s June CPI rose to 3.3%, ex Food and Energy +4.2%, now we wait for UK retail sales.

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