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Bond Market Insights - Mon, 19 Dec 2022

China IG was dominated by buyers on Friday, but some real money accounts are trimming risk with some bonds trading at historic tights. The street is still a willing buyer, trying to flatten out shorts. The China reopening story is driving the market with private banks buying retail favourites, such as New World (NWDEVL) and Bank of East Asia (BNKEA). There is also continued interest for perps and for floating rate notes. HY property is largely stable and amongst the industrials Yancoal International (YZCOAL) is in demand, yielding over 6%.

There was one clear message from the Fed and ECB last week; financial conditions need to stay tight. As US Manufacturers registered one of the sharpest declines in new orders since the 2008-9 financial crisis as measured by PMI, Fed's Williams reiterated that the Fed still has a "long way to go" as risks remain to the "upside", while Fed's Mester expects Fed to hike by more than its median forecast, will need to keep fed funds "above 5% in 2023" to curb prices. The Fed now expects higher inflation in 2023 than the market is predicting, a reversal of the status quo for most of the year. This leaves scope for the dots to be revised down if inflation comes closer to market pricing.

USTs continued to get dragged lower with Bunds overnight as ECB officials followed up Thursday’s meeting with more hawkish guidance. According to ECB's Knot the Fed is "closer" to end of its hiking cycle than the ECB, but he does not expect to the ECB’s interest rate gap with the Fed to completely close. German 2y yield pushed briefly above 2.50% while the US/German 10y spread narrowed to below 130bps which is over 30bps tighter over the week.


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