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Bond Market Insights - Sun, 25th Sep 2022

China property space had a mild correction into the weekend. AGILE fell a further 4-5pt and closed with a $30 handle. Real money and private banks sold on rumours that Agile might be preparing to extend the onshore 20番雅01 which is due next month. Benchmarks traded down a couple of points in sympathy. IG space was a touch lower; traders are already talking of preparing for Golden Week, a full week of holiday in China starting Oct 3rd. Fosun was down another point and non-China HY down 1-2pts.

IG and Frontiers sovereigns traded technically with dealers look to flatten out positions. Bid / Offer is widening further in quasi-government issues, limiting turnover. Pakistan gapped lower and the curve is trading under 50.00, SRILAN is holding just below 30.00. Mongolia is resilient but was still down 1pt.

GS points out that spreads on China A and BBB indices are now tighter than their equivalents in US IG after the strong recent rally. This could be due to the shorter average duration and the presence of a significant number of SOE’s within China IG. They still favour the single A China sector.

In Europe, as economic forecasts become more gloomy, doves like Spain’s de Cos and board member Panetta, are admitting that a recession, rather than just a slowdown, is needed to bring down inflation. France’s Villeroy, who was pushing against 50bp less than a month ago, now believes they could hike beyond 2% by year end. Evidence of a slowdown came as German manufacturing dropped to 48.3, while services collapse to 45.4 - their lowest since 2020. French services PMI surprisingly came in at 53, although manufacturing hit 47.8

The UK had a disastrous Friday with sterling collapsing to 1.08. PMI dropped to a 20-month low of 48.4 in September and the Debt Management Office added an additional £62bn in gilt sales, the bulk of the new issuance in the short end. There was a big sell off in UK 2yr gilt on the back of the Chancellor's announcement of a raft of tax cuts to be financed by additional debt. The market is now pricing in 5.4% for the BOE bank rate in one year. The biggest beneficiaries from the mini budget are businesses and the rich. Watch for push back from the Tory rank and file.

Singapore inflation was higher than expected at 7.5% y/y, outside MAS’s projection banks, keeping pressure to tighten again at its mid-October review. The labour market remains tight Q2, unemployment at 2.8% and wage growth at 6.8%, leaving risks that elevated cost pressures will passed on. The MAS has tightened policy four times since October. There will probably also be a recentring of S$NEER as it is currently trading around 1.5% above midpoint.

Rumours abound of a coup in China, claiming that President Xi is under house arrest, and that former president Hu Jintao and former PM Wen Jiabao have seized control of the Central Guard Bureau. Nothing has been substantiated, but uncertainty could give added strength to US$.


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