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Bond Market Insights - Thu, 20 Apr 23

10yr US treasuries traded in a ½ point range, having been hit by UK CPI and RPI readings. The Beige Book helped the market float back up to opening levels and saw the CBOE Volatility Index hit its lowest since November 2021, declining to around 16. The curve maintained a flattening bias as 2y yields held above 4.25% while 2s10s flattened through -66bps (session lows) into the close. The market is now pricing in 22bps hike on May 3rd, so 88% likelihood of a 25bps hike with the terminal rate edging slightly higher.

UK CPI was higher than expected and retail prices were up 13.5% y/y. Food prices up 19% in a year (enough to put me on a diet). A bright spot was core CPI, which is closely watched by BoE, flat at 6.6% as expected. Retail Price Index y/y came at 13.5% Expectations are now for terminal rates to reach 4.75% with hikes in May and June.

In Europe Schnabel uttered "Can't say" what will be decided at next ECB meeting. Lane reiterated "it will be appropriate to raise rates further". We have ECB minutes for March and more ECB Speak expected from Lagarde, Schnabel, Visco and Holzmann

Fed Beige Book language around growth was downgraded yesterday.

· Activity was described as “little changed” vs “increased slightly” and employment growth “moderated somewhat”

· The job market becomes “less tight” with districts noting “increases to the labor supply”.

· Wages showed “some moderation” but “remain elevated”.

· Prices rose moderately thought the “rate of price increases appeared to be slowing”

Fed-speak will probably try to cram in whatever is left to say before Saturday’s blackout ahead of the May 2nd-3rd meeting and there will be quite a few speakers on tap. More reaffirmation of a quarter-point hike at the May meeting and then we’ll stay tuned for when the next pack of crayons draws fresh dots in June.

In credit US IG primary issuance hit $18.5bn with financials leading the way. Morgan Stanley, Bank of America and BONY printed senior and TLAC bonds. TLAC stands for total loss absorbing capacity, which were first introduced in 2015 to ensure that global systemically important banks (G-SIBs) have enough equity and bail-in debt to avoid a government bailout. They sit above Tier 1 and Additional Tier 1 debt and the coupons cannot be deferred. All three deals were well subscribed.

In Asia markets opened unchanged with a positive bias. Pertamina Geothermal (PGEOIJ) , the Baa2/BBB rated Government owned Indonesia green energy company, is pricing a 5yr Green Bond at a semi-annual coupon of 5.6%. PGEOIJ is 75% owned by PT Pertamina (Persero) which trades at around 5%, so the deal should (usual disclaimers apply) go quite well. Books are at over $2.3bn.


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