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Bond Market Insights - Wed, 15 Feb 2023

Indonesia and Philippine sovereign bonds performed well yesterday, spreads tightening by up to 6bps to UST’s, Quasi sovereigns performed even better, tightening as much as 9bps as locals snapped up paper. Bonds still remain scarce. The market expects some supply from Indonesian quasi PT Pertamina, the oil and gas company, which should be easily absorbed. The frontiers were also well supported with better buying of Pakistan and Mongolia, prices up 0.5-1pt

China IG was steady yesterday, with the exception of HAOHUA and SINOCH which slipped +5 to 15bps on renewed fears of being put on the sanctions list. Global accounts trimmed longs, but Chinese real money stepped in to buy. Asset Management Companies’ spreads closed +3-10bp mainly due to Funds and street repricing benchmarks after HAOHUA widening.

China financials were mixed. China Asset managers and real money continued adding quality leasing and non-bank names. While saw some global AM selling There was some selling of Tier 2’s in afternoon ahead of US CPI data. AT1’s continued to trade with a soft tone and were down 0.5pt led by fast money selling.

The Property space slumped. Longfor Holdings fell 2pts before recovering to close down a point on the day. The rest were down a half to a full point. China Local Government Funding Vehicles were unchanged, being supported by local buying.

China January CPI rebounded from 1.8% to 2.1%, while MoM CPI rose from 0% to 0.8%, partly due the early Chinese New Year holidays, but a sound recovery of consumption was also evident, with tourism, transport, rentals and repairs, apparel and household appliances being the major contributors to the MoM CPI growth. The MoM decline of the producer price index (PPI) narrowed from 0.5% to 0.4%, and YoY drop expanded from 0.7% to 0.8%.

US Consumer prices increased by 0.5% in January, the largest increase in three months, annual inflation rate was higher than expected at 6.4%. The slowdown in costs seen in the last few months of 2022 appears to have stalled or even reversed in some key categories, such as energy and clothing. According to Jefferies, "Without used cars and public transport, which were the only two areas of weakness, core CPI would have increased by 0.5%. This was probably the last decline in used car prices for the time being, given the recent increases in wholesale pricing. Airfares are also unlikely to keep declining at this pace. So, the next core print is almost guaranteed to be a 0.4%, with risks skewed toward a 0.5% increase."

The Fed was out in force. Barkin said that the CPI report was as expected, but that "this inflation will be persistent"; Logan was also speaking, saying that he sees "gradual hikes" until there is a "convincing" inflation drop and Harker was rather non-committal, saying that he "don't know yet" what Fed will do in March and that Fed Funds will peak above 5%, but by how much is "unclear".

China's new regulation on asset risk classification is expected to strengthen banks' reporting standards and gradually reduce inconsistency in asset classification, according to Fitch Ratings. Successful implementation could improve the banking sector's reporting practices and transparency, potentially positive for the Chinese banks' operating environment and asset quality.

The rules require banks to classify all outstanding liabilities at a single corporate borrower as impaired if more than 10% of the borrower's liabilities have become non-performing, and expand the five-category risk classification from loans to all financial assets exposed to credit risk. The new requirements will make it more difficult for banks to bypass restructured loan classifications when granting loan extensions or repayment holidays at their discretion.

Over the day a couple of bond notes - Good buying across the TSINGH (Tsinghua Unigroup) curve following news that the group's chip design unit is seeking US$1.5bn in new funding. Sellers are around for Central China Real Estate, which has yet to pay the coupon for CENCHI 7 ½ 07/14/25, due last month. CENCHI 24's are trading in the mid 20's, the 23's in the low 50's


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