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Bond Market Insights - Tues, 09 May 2023

The Fed Senior Loan Officer Survey was less weak than feared, showing that the percentage of banks tightening standards was similar to levels during early 90s and early 2000s, but still well below GFC and pandemic levels. Only 8.2% of respondents report tighter residential mortgage standards, but residential demand was at a record low.

The US Treasury market slipped support levels as New York opened and drifted lower through the day. The front-end has remained solid while the broader curve has flattened. 5yr30yr is in about 15bp from Thursday's highs. Apart from some FedSpeak today, the next focus is CPI on Wednesday.

US$ high-grade primary market saw 11 issuers printing $23bn of new paper, Apple, Merck and T-Mobile led the way. In Asia Singapore’s government guaranteed Bayfront Infrastructure is touting 3yr at +70bps, while Exim Bank China initial pricing a 3yr at +75bps.

Tuesday’s morning session saw more demand for China IG as higher yields attracted buyers, especially 10-30yr part of the curve. Alibaba, Tencent, Baidu, HKAA were all popular, tightening in 2-5bps for most bonds. Buyers included real money and Life Co’s. HY was hit by headlines on Dalian Wanda, who is in talks with major China banks for loan relief.

As investors ponder on pivots in US rates policy towards the end of the year, pundit Jonathan Baird pontificated on the danger of negative real interest rates. Global real interest rates have trended downward over the long term and tended in recent decades, in normal times, to remain in the vicinity of 2%. A global return to this level will require a further significant move either down in inflation rates, or up in interest rates.

A pivot, in the absence of strong evidence that inflation is headed back to the 2% target zone, will mimic the behavior of the Fed of the 1970s, whose policies prolonged and amplified inflation through that period. The situation was aggressively countered by Paul Volker, who pushed the prime rate to 21.5% in 1981.


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