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Bond Market Insights - Mon, 30 Oct 2023

US equities were under pressure on Friday, bonds were pretty much unchanged, oil was back up 2.9%, but down about 2% over the week. US core PCE deflator was up 0.3% mom in September, up 3.7% yoy. This was the strongest mom rise since April and the three-month annualized change for core services ex-shelter, which bottomed at 3% in June, is back to 4%. Headline rate was also stronger than expected, up 0.4% mom vs a consensus at 0.3% mom. All this is slightly worrying for the Fed ahead of this week’s meeting.


China is estimated to have reduced its holdings of US treasuries by about $80bn in the first 6 months of 2023. Blackrock’s long dated US Treasury ETF TLT has taken up some of this slack after having lost almost half of its value since its peak in mid-2020. Investors poured in $2bn to the fund on Tuesday and Wednesday last week alone, bringing total inflows for the year to $21bn. The fund currently yields around 5%, in line with the 30yr bond.


Tokyo CPI was strong, up 3.3%yoy in October vs consensus of 2.8%yoy. Core-core was 3.8%yoy, vs consensus at 3.7%yoy, coupled with an upward revision to last month makes the BoJ meeting tomorrow a bit more spicy.


The BoJ has only one mandate, to keep prices stable. They follow inflation ex-Food, which has exceeded their 2% target for the last 18 months. Japan’s umbrella union, Rengo, said that they would demand wage hikes of at least 5% at the next “shunto”, the wage negotiations that take place in the Spring. This will be the biggest hike in 30 years. Could this force the BoJ’s hand to tweak policy? In Sept they maintained the policy stance and continue its more flexible framework for Yield Curve Control (YCC), introduced in July, keeping the rate for purchases at 1%. Some are looking for the YCC ceiling to be increased to 1.5%. Some think that the 10yr JGB target will be raised from the current range of 0% - 0.25% to 0.5%.


The UK it is expected that the BoE will keep rates on hold at its meeting this week.


In Asia Pakistan was the best performer of the week with more buying from accounts driving the front-end which ended 5pts higher. The 25s were up +9pts. Longer maturities, 2031 to 2051, were limited to a 2.5pts gain.


China property has been in the headlines, dominated by shenanigans at Evergrande and Country Garden. In IG property Vanke Real Estate (BBB/Baa2) was under pressure, tumbling 10-13pts as reak money and hedge funds sold offshore bonds as a result of a weak onshore performance. By comparison Longfor Group was mostly unchanged.


On a positive note, Ping An Real estate was up! PINGRE closed 3-4pts higher after Reorg ran an article stating “Ping An Insurance Group, parent of PINGRE, is considering providing about CNY 30 billion ($4.101 billion) financial support to help resolve PINGRE’s debt issues”.


Hyundai Capital America (HYNMTR) is marketing a 3-tranche new issue, its fourth foray to USD markets of the year. It will consist of 2yr and 5yr fixed rate and a 2yr FRN. The market is expecting the deal to come wider than existing issues given the significant global IG auto supply in 2H23. The operating co, Hyundai Motor Co., achieved strong Q3 earnings, but the auto sector remains vulnerable to a slowdown in global growth and rising auto loan defaults in the US.


Hyundai Capital America (“HCA”) is the financing unit of Hyundai and Kia’s US operations and is wholly owned by Hyundai’s US unit Hyundai Motor America, which in turn is 80% owned by Korean topco HMC and 20% owned indirectly by Kia Corp (HMC’s associate company in which it holds 34% of the equity). HCA bonds benefit from a letter of support from HMC, rather than a guarantee. Expected rating, Baa1/BBB+

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