The softness in the short end of UST’s started in Asia yesterday and significantly accelerated once New York came in after Fed’s Atlanta President Bostic said that Jan’s strong jobs report raises the possibility of a need to raise rates to a higher peak than policy makers previously expected. His base case remains for rates to reach 5.1% and stay there through 2024, but he sees scope for an additional 25bp or even 50bp increase if the strength in the data continues. He is also expecting inflation to be in the low 3% this year, above the Fed’s 2% target.
Fedspeak has become more important now the Fed and ECB have moved away from forward guidance, on that note watch for Powell tonight.
Overnight the Treasury 10-year yields rose 10.2bps to 3.63%; while the 5s30s curve flattened 8.9bps to -13.6bps. The market had priced in a 20% chance of only one more hike and a 80% chance of two hikes this year, but after yesterday’s move there is now there is a 20% likelihood of three hikes and a 80% likelihood of two.
Asia IG traded in a tight range on Monday. China Property continued to give back gains from the recent rally, with Country Garden dropping another -2.5pts. Other HY names fell around 0.5-1pts.
Australia Financials remained strong, spreads tightening another 1-5bps, although flow turned more balanced. Australian new issues have traded well over the last month. MQGAU 6.798% 01/18/33 is now trading with a 104 handle.
New issues are few and far between in Asia IG, but the US IG saw 7 companies’ issue $13bn of debt, with Becton Dickson, Micron Technology, NextEra Energy, T-Mobile and Northrop Grumman in the frame.
Today the US markets have opened unchanged and Asia credit is opening a little weaker with yield buyers taking advantage of the rates move. With the exception of India the market mostly well bid and in need of issuance. ADANI is stabilizing at current levels with flows pretty balanced while Vedanta is still under pressure and down 1-2pts.