Bond Market Insights - Tues, 04 Apr 2023
It was a choppy start to Q2 for US Treasuries. The initial reaction to OPEC’s announcement was illustrated by Fed’s Bullard who said the decision was unexpected and an increase in oil prices could make the Fed’s job of lowering inflation more challenging. “Whether it will have a lasting impact I think is an open question,”
By the close the market was higher and slightly steeper, preferring to focus on the weaker than expected ISM manufacturing data. instead. All the components were under 50, implying a contraction. The move higher was led by the 5yr as 2yr yields slid back below 4% (17bps range) while 10yr dipped to 3.40%. TIPS lost their bid and break-evens ended tighter on the day. Rate hike probabilities for May firmed, there is now around 16bps priced in, but more cuts were priced into 2024, the market is now expecting 100bps of cuts by March.
Note: Treasury Inflation Protected Securities are fixed income securities whose principal and coupon payments are linked to non-seasonally adjusted CPI. The spread between Treasury securities yields and TIPS of similar maturities is called the “breakeven inflation rate” (BEI).
The MAS announcement clarified the common equity and additional Tier 1 situation for domestic Singapore banks in Singapore dollars. Even so interest from the private banking sector is becoming evident for SGD denominated Foreign Bank AT1’s with longer dated calls. Those with shorter dated calls are being avoided, despite the recovery in the G3 space. Interest is also seeping into the Tier 2 sector.
Argentina is being buffeted by events in the law-courts. In the US after years of litigation, a group of investors won a judgement against the government for the forced nationalization of YPF. It had paid $4 billion in bonds to the Spanish energy giant Repsol. Speculation is that it could end up costing the sovereign $20 billion. Next in the legal line will be the lawsuit regarding the GDP Warrants, whereby plaintiffs argue the government manipulated the 2013 GDP calculations in order not to pay investors.
The Asian session ended firm today with, spreads 1-3bp tighter and AT1s moving up .25pt higher. Despite some real money selling there was a good underlying bid.. The new Shinhan Bank bonds performed well,, 5bp tighter than RO.. The SK Hynix curve was hit by 7-12bps following the launch of its US$1.7bn convertible bond,, HYUELE 1 ¾ 04/11/30, yesterday. The bonds can be exchanged into 20.13 million SK Hynix shares, which represents 2.8% of the total shares outstanding.
This week is strewn with holidays, from Ching Ming to Easter, which is keeping activity subdued