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Bond Market Insights - Mon, 27 Mar 2023

The most surprising aspect of Fed Chair Powell's comments this week was the absence of a firm distinction between monetary policy tools and financial stability measures, unlike his European counterpart, Lagarde. Fed's Bullard out was placating the masses on Friday, saying that macro-prudential policy "can contain financial stress", while "appropriate monetary policy can continue to put downward pressure on inflation" adding that abandoning the 2% inflation goal would be a "disaster".

On the data front Euro PMIs were mixed. Manufacturing missed, down 1.4pts to 47.1 in March, but services were better, up 2.9pts to 55.6. The strength in services would have helped a hawkish ECB narrative had it not been for the recent banking-sector stress. US PMIs were higher than expected, manufacturing up 2pts to 49.3 in March, services up 3.2pts to 53.8.

The US IG market opened soft on Friday after weakness in Deutsche Bank stocks and bonds dented weakness once more, but as equities started to perform spreads recovered as well. This allowed Asia credit to open marginally tighter. thanks to a firmer US session after the move wider into Asia close. With the rapid move to lower yields at the front end of the US curve an abundance of short paper has hit the streets, pushing spreads wider by 20-30bps.

Following the MAS clarification on where Singaporean banks’ Additional Tier 1 bonds are positioned in the subordination stack buying interest has supported DBSSP 3.3 PERP, while Thai AT1’s are still dominated by sellers.

The ability to re-finance AT1’s will be tested through Q2. UniCredit has put in a request to the ECB to redeem its €1.25bn 6.625% Perps in June and some commentators claim that they are likely to exercise the call. The hybrid has quite a step up, resetting at mid-swaps +638.7, which at current levels would be 9.292bps, quite a jump from 6.625%, but where will they be able to re-finance? What will the appetite be for a new issue? UCGIM 6 ⅝ PERP is currently priced at a mid-yield of around 21% to call. If not refinanced as an AT1 the company would have to issue €1.25bn more common equity to preserve the same level of Tier 1 capital.

The clocks changed over the weekend with UK and Europe pushing forward 1 hour. Australia and New Zealand fall back, Singapore (as with Singaporean weather) continues unchanged.


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