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Bond Market Insights - Mon, 24 July 2023

Friday was a bit of a dud in New York as the markets took a breather ahead of the big week of central bank meetings we have in store. In both US and in Europe hikes of +25bps are expected, taking the fed funds range to 5.25%-5.5% and the ECB deposit rate to 3.75%. In Europe a further 25bps is anticipated, but views on the US are less certain. The Fed will become more data-dependent from here and there is a growing opinion that this will be the last rate hike as a softening in the labour market and inflation data becomes apparent.

The Bank of Japan is also meeting and there are hopes that there might be an upward revision in the target for the 10yr Japan Government Bond yield, but this maybe a bit premature.

Today we have US PMI and the Fed report from Chicago. The $42bn 2yr note auction kicks off the week and will be followed by $43bn 5yr on Tuesday and $17bn 7yr on Thursday.

Asia IG action on Friday defied meaningful comment, but there was some movement in China HY. Country Garden took a bit of a beating as onshore bonds fell sharply, causing a trading halt. This was despite news of the company securing 2yr dual currency loans to cover redemptions. US$ bonds fell between 3pts to 8pts. Shui On Development opened positively, up 2-3pts higher, then was dragged back half of that in Country Garden’s wake. China Industrial names continue to push ahead, with Fosun and West China Cement up another 1pt.

Korea Electric Power Co (KEPCO) announced initial pricing (IPT) for a new 3Y sustainable bond at CT3+135. The bond will be traded over the 2yr treasury, so this equates to CT2+95. Despite the indigestion apparent in the Korea sector shorter dated quasi-government paper has been well bid. Good comparisons would be Korea Gas or Korea Oil. Adding a small new issue premium, fair value would be 35bps tighter.

China international markets were heavy over the last week, weighed on by economic data. 2Q GDP disappointed at 6.3% vs expectations of 7.1%; China’s total retail sales grew 3.1% YoY in June but it slowed sharply by 9.6ppt from May, while fixed asset investment in June was dragged by the real estate sector.

Policy makers were making lots of noise and directives, which all sounded very good but where is the road map, how will these ideas be implemented?

July 14 - the State Council held a press conference on financial statistics for 1H23. The People’s Bank of China (PBoC) mentioned that it could support and encourage commercial banks and borrowers to negotiate changes, allowing existing home mortgage loans with relatively high interest rates to be replaced by new loans with relatively low interest rates.

July 19 - the CPC Central Committee and the State Council issued guidelines on boosting the growth of the private economy, promising to improve the business environment and enhancing policy support so that it can play a bigger role in advancing “national rejuvenation”.

July 21 - during an executive meeting chaired by Premier LI Qiang, the State Council called for the steady promotion of the renovation of urban villages to improve people's livelihood, expand domestic demand, and promote high-quality urban development, stressing that policy support for renovation work should be ramped up to encourage the participation of private capital and the development of new business formats to achieve sustainable operations.

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