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Bond Market Insights - Thurs 18 Jan 2024

The post-Waller repricing in the front-end accelerated Weds after a stronger-than-expected December retail sales print. +0.6% on the headline (v +0.4% est) while control group was +0.8% (+0.2% est). The upward revisions prompted some upward revisions to Q4 PCE and GDP forecasts, Goldman raised their Q4 GDP call to 1.8%, down from 1.5%, while Atlanta Fed’s Q4 GDP was up to 2.4%, from 2.2%.

Front-end yields spiked, 2yr yields spiking 15bps by the afternoon, the largest 1 day move since June,   10yr yields climbed to 4.10% while the long-end held in relatively well . The $13bn 20yr reopening saw weaker demand tailing 0.9bps (4.423%) amid the lowest indirects and highest dealer take up since Nov 2021.

Gilts got trounced with UK5yr yields spiking by +23bps after the stronger than expected Dec CPI print, 0.4%mom in December and 4.0% yoyd, up from 3.9% in November. Core was steady at 5.1%yoy.

German 2yr yields were up 10bps on more ECB gloom. Lagarde thinks it’s likely the ECB will cut by summer, will have to judge wages data in "late spring" she added "Optimistic" market pricing does not help the inflation fight. ECB's Vasle, who is typically a hawk said that his rate cut expectations are "significantly different" to market, "absolutely premature" to expect cuts at start of Q2. ECB's Knot (also a hawk) said the rate path priced by markets can be "self-defeating", the more easing the market delivers, the "less likely" that ECB will cut. In consolation he added that its "rather unlikely" that ECB will have to hike again.

China Q4 GDP was up 5.2%, lower than expected. Deutsche sees China economy improving over the next few months based on signs of a pickup in non-property investment and export growth. Comments out of Davos seem to corroborate this view with many multi-national companies looking to maintain or increase their presence there, such as IKEA, ABB, Aldi and Generali.

Recent reports suggest that the Chinese government is planning to issue another CNY1trn (0.8% of GDP) of ultra-long maturity special sovereign bonds to fund public investment projects, which could result in fiscal spending growth will see a notable jump in 2024 to around 8%. Current GDP growth is at its lowest since 1976, excluding the covid period.

Sri Lanka aims to finalize a foreign debt restructuring plan by the beginning of April, signaling progress in emerging from the economic crisis. The nation defaulted on its $46 billion foreign debt in 2022, leading to an IMF bailout conditional on a satisfactory debt deal with foreign creditors. The government secured an "in principle" debt agreement with China, its largest bilateral lender, and received a $337mm IMF tranche. The Chinese deal reportedly involves extending loan tenure and reducing interest.  

A glance at LATAM. The IMF is urging the Argentine opposition to support the "omnibus law," encompassing the fiscal programs of Javier Milei and Luis Caputo. The government aims for partial approval in the Chamber of Deputies before the weekend, coinciding with the IMF Board's potential approval of a US$4.7 billion disbursement next week to cover imminent capital repayments. This support follows discussions at the World Economic Forum in Davos, where Cabinet Chief Nicolás Posse and Economy Minister Caputo met with the IMF's Gita Gopinath.

Tax reform is on the agenda for Brazil and Ecuador. Brazil has an ambitious agenda, led by the Extraordinary Secretary for Tax Reform, Bernard Appy and have teams working with a tight schedule to produce preliminary drafts for the comprehensive reform by March/April. Ecuador is proposing a hike in VAT from 12% to 15%,


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