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Bond Market Insights - Tues, 27 Sept 2022

Selling of Asia IG on Monday pushed CDS up 10bps, while China, Japan and Korean bonds were held to a 4-6bp widening. There were balanced flows in the front end but the long end was dominated by trading real money selling.

HY property was weak to start but short covering pulled it back to unchanged by the close. The gaming sector was boosted by the prospect of incoming domestic travellers; Melco rebound 5-7pts, other names were up 3pts. AT1 was down ahead of today’s successful redemption of the $7.25bn POSABK 4 ½ PERP

After yesterday’s drama Pakistan saw light selling overnight from ETF’s in the belly, down another 1pt. REDD released a report saying that China might accept the exclusion of PKSTAN 5 ⅝ 12/05/22 from debt restructuring. Pakistan’s Finance Minister reiterated that it intends to repay the issue in full and on time, but that other Eurobonds may be included in future debt restructuring. The long end is already trading below 40.00, but shorter bonds might be impacted.

UK yields surged again. The rolling 5-day move in 5-year UK gilts is the largest since daily data first became available in 1979. The 10-yr gilt move is the largest since the UK applied for a loan from the IMF in 1976. GBP/USD fell to its lowest level since 1985 and is close to the post-war lows of 1951! The market is pricing in 6% yields presently, although this can change rapidly as we saw yesterday when short sterling had an 80bp range. There are a lot of BoE speakers this week, perhaps shedding more light on the BoE statement that the "MPC will not hesitate to change interest rates … to return inflation to the 2% target" and “Will make a full assessment (of the impact of the government's fiscal announcements and the fall in sterling) at its next scheduled meeting".

US 10yr note climbed 21bp to 3.89%. A concern for the market is that should a coordinated FX intervention to weaken the USD be orchestrated, it would probably involve sales of US Treasuries by foreign central banks.

Data misses in US and Europe occurred yesterday. Dallas Fed manufacturing was down 4.3pts to -17.2 in September, consensus looked for a rise. German IFO also missed, down 4.3pts to 84.3 in September. It is now nearing the all-time low of April 2020 bolstering the view that a sharper contraction for the Germany economy is likely.

China IG opened a few bps wider this morning and has run into good buying of China SOE names across the curve as onshore accounts add some bonds ahead of the holiday next week


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