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Bond Market Insights - Thurs, 21 Sept 2023

UK CPI kicked the market into action, causing an aggressive bull-steepening move after a weak +0.3% m/m for headline CPI, with YoY at 6.7% which was well below the +0.7% and 7.0% median forecasts. Core fell to 6.2% vs 6.9T expectations and CPI services annual rate slowed from 7.4% to 6.8%. The market took 8bps of tightening from tomorrow’s BoE meeting, while red SONIA contracts jumped 17 ticks. What’s priced in?

In the US the decision to leave rates unchanged for now was no surprise, but the forward guidance came as a shock to those who still see rates quickly reverting to the 2%-3% range. The 2024 DOT was revised 50bps higher, indicating just 50bps of rate cuts next year, while some banks had expected an unchanged prediction. There were some small tweaks to the FedSpeak, the characterization of growth was upgraded from “moderate” to “solid,” while the characterization of employment growth was downgraded to has “slowed” but “remain[ed] strong” Powell’s press conference repeated that they have a ‘long way to go’ to get inflation to 2% but he repeated that the Fed could proceed more cautiously with rates in restrictive territory.

US treasuries bear-flattened. Yields went with 2yr touching 5.17%, 5yr at 4.57% and 10yr reached 4.39% The terminal rate has been pushed out to the January meeting and has climbed to 5.47%. The largest move was in the late 2024 dates with >5% rates now extending through September of next year. Technically 2yr yields broke through resistance at 5.12%. If this level prints as a weekly close we could accelerate to the 2006 high of 5.275%.

The US Dollar had been offered in the morning but bounced through the FOMC with BBDXY going out near session highs above 1254. Poor old Sterling is getting hit, reaching a fresh low this morning of 1.2313.

Asia was a tad weaker with China HY about 1pt lower. SOE’s were about 0.5 lower with both real money and hedge funds leaning on the market. Bucking this trend was Huarong (HRINTH) following their buyback announcement overnight. Bonds rallied up as much as 2pts int the 47’s.

Asia credit proved quite resilient this morning. with decent demand for high quality Korean paper, real money showing interest in AA/A/BBB from 2-10Y tenors, pulling spreads in by 1-3bp. Genting complex slipped 0.25-0.5pt lower, as Fitch downgraded Genting Malaysia's (GENM) standalone credit rating by 1 notch due to uncertainties over license bidding.

In China a National School of Development at Peking University seminar focused on undisclosed local government debt, accumulated primarily through off-the-books borrowings to meet funding deficits exacerbated by the pandemic and housing sector crisis. There is a lack of official figures, but estimates suggest that interest-bearing local government financing vehicle (LGFV) debt surged to 54.6 trillion yuan ($7.8 trillion) by the end of 2022, a significant rise from 32.6 trillion yuan four years earlier. Addressing this challenge might necessitate novel approaches, such as permitting local authorities to offload bad debt to asset managers and reallocating a larger portion of tax revenues to them. However, experts emphasize that the mere act of formalizing off-the-books debt does not rectify the foundational issue of local government's inability to repay their accumulated liabilities.

China has stepped up monitoring of local government finances, Ministry of Finance’s Head of the Treasury Department Li Xianzhong said at a briefing, highlighting that the economic momentum in some local regions is insufficient and their fiscal balance is tight.

Beijing has embarked on a 1 trillion yuan program to help provincial governments repay hidden local debt. Domestic new issuance of LGFV debt in August was up almost 50% from July. Investors are showing a clear preference for shorter dated debt, the average tenor for 1H23 being 2.51 years. S&P warned recently that the liquidity soundness of lower-tier LGFVs is deteriorating quickly, with this buildup of short-term debt amid depleting cash positions.

Indonesia’s President Kokowi highlighted a significant 17-fold increase in the country's nickel export value, which surged from $2bn to $33.2bn following a 2020 ban on unprocessed nickel ore sales, so preserving the value chain for the greater good. He reaffirmed his intention to introduce similar regulations for other commodities like copper, bauxite and tin.


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