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Bond Market Insights - Mon, 06 Nov 2023

US equities were stronger again Friday, S&P up 0.9% with the rally across the second half of the week leaving the index 5.9% higher compared to the Friday prior, the biggest weekly gain since November 2022. US10yr yields fell another 9bps Friday to 4.57%, down 26bps over the week.

The payrolls report marked a reversal of the robust data the prior month, making it look more like an aberration than a new trend. Still, job gains remain sturdy and the labour market tight from a historical perspective.

Highlights this week, include speeches from Fed, ECB, BoJ and BoE. On the data front, University of Michigan's consumer survey and the Fed's SLOOS report. Q3 GDP in the UK and economic activity indicators in Germany. Wages in Japan and inflation and trade reports in China.

It feels like there has been a yield curve caused blood bath on the street with the market whipsawing all week. Powell the Dove’s press conference on Wednesday caused a sharp steepening of the curve. Market rhetoric added fuel to the fire with bonds analysts calling for further steepening. Interestingly Thursday’s rally, following the weaker Durable goods and Unit Labor Cost data, came in the form of an aggressive flattener. Long bonds led the way, dragging the 5yr-30yr spread from the new wides of 29bp, all the way down to 16bp by end of day. On Friday non-Farm Payroll only missed by the amount of auto industry jobs lost last month (auto worker's strike), but this catapulted the market higher, but this time in the form of a massive steepener. The 5yr-30yr spread blowing back out to 26bp.

A Bloomberg report points to the largest net short positions since 2006, according to CFTV figures from Oct 31, a driver for all this volatility.

2yrs are trading almost 50bp through the Fed Funds rate. The market is questioning market outlook from just a week ago, but unless something dramatically changes the curve should have a tough time going any further. It would need a statement from the Fed that they will be easing, negative job prints or another banking crisis, like SVB; the insolvency of Citizens Bank is Sac City doesn’t really count. What’s priced in now? Futures are pricing in only 4.5 bps hike through to the January meeting, then 50bps of cuts in the first half of 2024 with 100bps priced into year-end 2024.

In Asia, Vedanta has been in the news as they are getting close to a US$1.25bn loan with an interest rate of 18-20%; positive for short-dated bond holders, but onerous for the rest.

In primary, Fukuoka Life (A+) is hoping to print a subordinated perpetual, non-callable for 10yrs.


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