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Bond Market Insights - Wed, 08 Feb 2023

Fed's Powell's message was Hawkish: The disinflationary process has begun but, to quote, it has a "long way to go"; the "process will be bumpy", and "need further rate increases". US financial conditions "more well aligned than they were before". January payrolls "certainly stronger than anyone expected", shows why disinflation will take a "significant period of time". Fed may have to "raise rates more than has been priced in" if "we continue to get strong labour-market reports or higher inflation reports. This was the cause of much intra-day volatility mainly in the afternoon.

The 3yr auction in the US was a bit of a mess as it came while Powell was speaking, at the highs of the day, and as a result tailed ~4bps in what marks the first UST auction tail for the year. But this is purely poor timing as the rally was on air, so in actuality the tail was smaller than it seems optically. UST 10yr yields were up +3.4 bps at 3.676%; 5-30s steeper by +3.2bp to -12.4bps; 2-10s still inverted by around -80bps

The ECB's hobbits were speaking yesterday, Schnabel and Nagel (where is Smeagol?) Nagel is the more hawkish, saying that more "significant" rate hikes are needed; policy "not yet" in restrictive territory; rate cuts "not on agenda" for foreseeable future. Schnabel opined that inflation slowdown so far "not yet linked" to ECB policy, inflation momentum still "quite elevated", ECB keeping "close eye on core inflation".

The Adani saga continues. Asia selling is being met by US buying, Oaktree and Davidson Kempner being mentioned by Bloomberg, although there was so profit taking as prices reached a zenith. The Adani group has been busy prepaying loans and pledging to reduce debt ratios. Adani Ports said yesterday that it will repay debts of around US$600mm, while the Adani family repaid US$1.11bn of personal loans backed by stocks. Vedanta has recovered a point from the close of yesterday.

China's banks are facing a surge in funding costs due to the country's rapid reopening, causing a temporary liquidity squeeze, China’s overnight repo hitting 2.3602% today, the highest in 2 years. In January, Chinese banks are said to have made Y4.2tn in new loans, triple that of December. There is a record CNY5.9tn of interbank debt, non-negotiable certificates of deposit, that needs to be refinanced by the end of March and CNY300bn of medium term policy loans mature next week

Mixed session on light volume this morning. In China, street still digesting bonds that came out yesterday. HK Perps .25-.5pt lower with retail profit taking. In South Korea, SK Hynix (HYUELE) widened 5bp as local accounts buying cools, following the S&P positive move.

There has been a dearth of issuance from Asia, which the Middle East is taking advantage of, meeting demand for sukuks from the GCC and Asia . Saudi's PIF issued $5.5bn 3 tranche being priced today, Emirates Islamic is issuing 3yr AED sukuk, Dubai Islamic is roadshowing a 5yr sukuk amd GreenSaif, the Blackrock/Aramco structure, is launching a 3 tranche US$ deal, one of them being a sukuk construct.

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