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Bond Market Insights - Mon, 14 Aug 2023

UST yields jumped higher following PPI. Now all of the new refunding issues are trading under water. Analysts were flagging the upside risk to this month’s PCE price data after PPI topped estimates with core +0.3% m/m (0.2% est) while the y/y reading saw its first uptick in 13 months.

The front-end led the move lower initially, 5s30s flattening 10bps, but was then saved by the UMich survey. Investors anticipate that treasuries will continue to be whipsawed as economic uncertainty threatens to keep rates higher for longer. Barclays is advising clients to sell two-year on anticipation the Fed will keep its benchmark elevated next year, while Goldman predicts rate cuts starting in June.

This week the FOMC minutes will be in focus, but will be preceded by Tuesday’s July Retail Sales followed by housing data including NAHB housing index and July housing starts/building permits.

In Asia the RBNZ meets on Wednesday with consensus keeping the OCR unchanged 5.50% The current OIS rate reflects a mere 8% chance of a 25bps hike. The Reserve Bank of Australia August Meeting minutes are due tomorrow. After leaving MonPol settings unchanged, Gov Lowe said at his Parliamentary testimony “the Board is seeking to establish a credible path back to the inflation target over the next couple of years to avoid a damaging shift in inflation expectations.”

India’s inflation report is due today, consensus calls for headline y/y to jump to 6.5%, a large move from June’s 4.8%. More trouble is hitting the tapes as the Adani complex has opened 0.5-2pts lower after Deloitte resigned as the ADSEZ auditor. According to Adani's announcement "Deloitte indicated a lack of a wider audit role as auditors of other listed Adani portfolio companies. The Audit Committee was of the view that the grounds advanced by Deloitte for resignation as Statutory Auditor were not convincing or sufficient to warrant such a move. It was also conveyed that it is not within the remit of the ADSEZ and its Board to recommend group-wide appointments as other listed Adani portfolio companies are completely independent, with separate boards, executive teams and minority shareholders."

China’s data dump will the dominated by IP, Retail Sales, Jobless rate, and Fixed Assets this week. China’s July financial data was surprisingly week. Total social funding and new credit lending were about half of what was expected. Corporate loan growth was negative for the first time in 12 months while M2 growth slowed to 10.7%. July exports declined 14.5%, imports down 12.4% y/y. China’s CPI was -0.3% and PPI -4.4% y/y.

Country Garden is another drag. Having been China’s largest property developer by contracted sales and sporting investment grade status, it now trades as a penny stock and has missed coupon payments on US$ coupons, it now has 30 days to make good on those to avoid default. Country Garden warned investors last Thursday that it would likely record a loss of up to US$7.6bn in 1H23, its share price tumbling to a record low of HK$0.89, down over 60% since the beginning of this year. COGARD 6.15 09/17/25 is now priced at 6.50/8.5. JP Morgan believes that Country Garden’s troubles will exacerbate the already-low confidence in Privately Owned Enterprises, hitting sales. Banks might be even more reluctant to provide new financing to these POE’s, despite the government pushing for more refinancing for the property sector. The volume of onshore bond issuance with government guarantees has also slowed since 1Q23, raising doubts that government support would be sufficient to prevent another large-scale default. Perhaps time to check names like Ping An Insurance, which holds 5% of Country Garden’s stock.

Adding more pressure to China President Joe Biden on Wednesday issued an executive order that authorized the US Treasury secretary to prohibit or restrict US investments in Chinese companies in several sectors, including semiconductors and microelectronics, certain artificial intelligence systems, and quantum information technologies. This could include PE and VC investors.


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