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Bond Market Insights - Thurs, 04 May 2023

The Fed hiked rates by 25bps and suggested that this may be the last move in their most aggressive tightening campaign since the 1980s, if incoming data allows. This is a change from their previous statement in March, which anticipated that some additional policy firming may be appropriate.

Powell was more forthright, saying that the outlook for inflation does not support rate cuts. He also emphasized expected further tightening via bank lending conditions, which could possibly be revealed in the SLOOS survey due next Monday. That would mean less work for official rates.

SLOOS is the Senior Loan Officer Opinion Survey on Bank Lending Practices. It polls up to 80 large domestic banks and 24 branches of international banks. SLOOS asks a subset of U.S. banks if they have faced stronger than usual loan demand, if they tightened their requirements for approving loan applications, and which specific loan contract terms they adjusted on those loans they were willing to approve. Pretty relevant to todays issues.

The FOMC has pledged to keep interest rates elevated for a time to make sure inflation continues pull back toward the 2% target, so far it is down to 4.2% from the peak of 7% last year. Projections show officials expect to maintain the federal funds rate above 5% through the end of 2023.

US April ADP National Employment Report saw a burst of hiring, up `206k vs consensus of 150k. Pay growth is constrained and there are fewer people switching jobs. ADP has been an unreliable guide to payrolls recently, so let’s not pop champagne yet.

After the rate decision macro conditions weakened. Equities were down, oil slipped 5%, and the US treasury curve rallied as it bull steepen, 2s10s is inverted at -47bps, 5s10s is positive, at +3.bps. Most commentators I read are now plumbing for a first rate cut in 1/2024.

There was no activity in US IG primary, secondary spreads were 3~5 bps wider for corps, 5~10 for financial subs and even wider for the lower tier banks. The market is still looking for a credit tightening driven recession and targeting the next vulnerable regional bank target. PacWest slipped slightly into the close but then dropped over 50% in after hours trading, taking other bank stocks with it after a report that the company' was considering a possible sale.

Again, no US treasuries this morning due to Golden Week in Japan. CDS indices opened 3-5bps wider and there has been early selling of 10yr benchmarks. HY is broadly about 0.75pt lower

S&P reaffirmed its selective default (SD) rating on Sri Lanka's foreign currency debt and kept a negative outlook on its rupee debt. The rating agency noted that there is a high risk of non-payment of commercial debt repayments within the next six months due to the country's economic, external, and fiscal pressures.


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