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Bond Market Insights - Tues, 18 July 2023

US Treasuries 3-5yr sector continued to lead the market in New York, it had been boosted the big miss on China GDP, which was up 6.3%yoy in Q2, consensus at 7.1%yoy on weak consumption and a further deterioration in the property sector. China’s slower-than-expected growth could be contagious, even so Yellen is keen to assuage fears, maintaining that she “doesn’t expect a recession”. Yellen also said that she sees the US on a “good path” to bringing down inflation without a major weakening in the labor market. To back that up Ford announced a price cut for the F150 Lightning model, pointing to improved supply chain conditions, lower input costs, higher output, and reduced consumer prices. Wood pellets, not often mentioned in this blog, are a volatile commodity and led prices higher in the past few years. 2023 has seen a dramatic and continuous decline. I am usually disparaging of Mrs. Yellen, but perhaps she is on the right path.




The FOMC is now in blackout, but June retail sales and industrial production will provide the committee with fresh insight on demand and output. Despite the recent softness in inflation and strength in both economic activity and the labour market, the Fed is likely to keep the FOMC on course. They have been wrong-footed on inflation recently and will not want to be caught off guard should the data re-accelerate in coming months.


As rates have recovered so the new issue window reopens. Four US IG deals totaling $7.125bln hit the market yesterday, including a $4.5bn 2-tranche from JPM and $1.7b 5y from Wells Fargo. In Asia Shinhan Financial (SHINFN) (A1/A) has announced initial price talk (IPT) for a 5yr social bond at T+135, fair value looks to be around +105. SHINFN is the holding company issuer and is rated 1 notch lower than Shinhan Bank (Aa3/A+). The Japanese SMBC Aviation Capital has announced a 10yr with IPT around T+220, expect final pricing to be around +195. KDB is also in the market with a 5yr floating rate note, drawn on their MTN program. The bond is dual listed, SGX and Taipei, and is expected at SOFR +95. Swire Properties have chosen the offshore Chinese yuan, CNH for their fund raising efforts, intending to launch a 2yr at 3.6% and a 5yr at 3.85%.


More on China GDP and the economic situation. The deflator turned negative for the first time since the GFC. Funding costs are over 4.5% and PPI is at -5.4%, so firms are paying double digits real interest rates. Industrial production reaccelerated in June while domestic and foreign demand fell. The services sector is also starting to falter and the property market continues to be a drag, with housing starts, sales and investment growth all contracting again. Beijing has always come to the rescue before, but seems reluctant to step in to stop the rot.




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