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Bond Market Insights - Thurs, 16 Mar 2023

Updated: Mar 20, 2023

The March FOMC meeting is now priced between a pause and a 25bp hike, but looking further forward markets are now pricing in sharp cuts, implied Fed funds dropping from 4.81% to 4.18% from May to August. US Treasuries are having a wild ride for the 3rd day in a row. The intraday range for the 2yr was over 50bps.

The fallout from the recent bank failures has prompted calls for the Fed to stop QT to ensure banks maintain sufficient reserves for meeting deposit outflows but, as Deutsche Bank points out, reserves have become heavily concentrated at the largest banks, leaving regional banks with weaker liquidity positions.

European markets area also priced for a quarter point hike from the ECB. The economist consensus survey calls for 50bps, but this was taken before the turmoil started by SVB and aggravated by CS, so rather out of date… what a difference a day or two makes.

Financials have, rather obviously, been the focus over the last few days. Credit Suisse debt started off quite muted until the Saudi National Bank said they wouldn’t lend more support. CS stock fell 30% and the hordes ran to sell CS AT1’s and senior holding company bonds. AT1’s fell 20-40 points and senior holdco bonds were down as much as 30 points. Then the other SNB, the Swiss National Bank, headlines were the catalyst for a bounce. Distressed buyers were out buying the lowest $ cash price bonds. There were buyers of senior operating company bonds throughout yesterday’s session.

China high yield continued to be well supported yesterday, pushing higher by as much as 2pts. In IG, TMT bonds faded to close tighter by 5bps at the end of day Today credit leaked wider through the session, particularly Korea financials, which widened 15bps in places. AT1's slipped a couple of points. Volatility in macro has sidelined a lot of accounts,.

Frontiers are underperforming, particularly Pakistan. We saw a ~2pt move lower yesterday afternoon taking us to flat to Sri Lanka on concerns around potential default. While the concerns are valid we do feel that there is a possibility of an IMF deal being struck which should give them some breathing room and allow them to muddle through for the time being, so we do feel the asymmetry from these levels is to the upside given we are pricing as if in default already. Mongol saw some RM selling and Sri Lanka some ETF selling, and both are 0.25-0.5pt lower.


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