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Bond Market Insights - Wed, 05 Apr 2023

US Treasuries were weak through the Asia and the London morning sessions, but ripped higher as US data was released, led by the front-end. SFRZ3 jumped to 95.965, up over 35 ticks from Monday’s pre-ISM lows. Terminal rates were nearing 5% before falling back below 4.95% on the data. The market is back to pricing less than a 50% chance of a 25bp rate hike in May.. Asia was greeted by some comments from Mester saying the Fed will need to get rates up "a little bit more. but that they will not keep hiking until inflation reaches 2%,

The data published yesterday showed less jobs and falling demand. US Feb JOLTS job openings fell 630k to 9.93m, their lowest level since May 2021. The ratio of job openings to unemployed fell to 1.67 vs 1.86, indicating some easing in demand for labour but still well off a balanced labour market. The largest drop in openings was in professional and business services, followed by healthcare. Accommodation and food services, saw openings fall back to middle of 2022 levels. Construction job openings picked up despite the sector’s interest rate sensitivity

US factory orders for February fell by -0.7% m/m. Excluding transport, orders were down 0.3% m/m. January factory orders data was also revised down considerably.

Note: SOFR is the Secured Overnight Financing Rate, a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. SOFR 3-month futures are traded on the CME. Z3 refers to the month and year of expiry. Z stands for December and 3 for 2023.

The euphoria in rates markets was not echoed in equities, There was renewed pressure on bank stocks with KRE regional bank ETF down -3.2%.

Commercial real estate lending could be the next domino to fall according to analysts at MS. Over US$1.4 trillion of CRE mortgages have to be refinanced over the next 2 years, nearly 50% of the $2.9tln outstanding. Regional banks account for a large portion of existing loans.

Back in Asia it could be worth checking the Chinese USD LIBOR FRN sector. Many of these will soon mature, leaving only 2 BOCAVI, 2 ICBCIL, 1 CCBL, 4 BCLMHK, and 1 TENCNT outstanding. Over the past 6 months as the Fed hiked rates these offered attractive yields, but they were hard to find, but sellers have started to appear since the Fed seems to have stalled. Yield spreads are higher than comparable bullet bonds, and there is the protection against potential headwinds for markets.

Today is a holiday in HK, so liquidity will be scant ahead of London opening. It is also a holiday in China and Taiwan.

Post-script - NZ raises key rates to 5.25% from 4.75%


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