Bond Market Insights - Wed, 22 Sept 2022

The dot plot was a bit more aggressive than expected at 200bp by end-2022 instead of 175bp with the terminal rate raised to 4.6% and a rate cut in 2024. The Fed’s scenario remains for a soft landing, with unemployment peaking above FOMC longer term estimate of 4% and core inflation declining smoothly to sub 3% by 2024. There was no mention of selling mortgage-backed securities, perhaps the Fed has no appetite for the large capital losses these would entail

The Bank of Japan continues to defy the global tendency for higher rates. Policy rates are unchanged, as is the target rate for 10yr JGB’s at around 0%. JPY has settled around 144.50, although a knee jerk reaction took to 145.36. Reuters points out that one quadrillion yen is lying idle with Japanese households and is preparing to be shipped overseas when yields abroad rise which would put further pressure on the currency.

The Asia credit market reacted well this morning, with no signs of capitulation. Asian CDS ended the morning 6.5bps wider. Sovereigns were down 0.75pt. China IG held in well while non China was mixed. China HY was 1-2pts lower. Azure Power Energy bounced about 2pts on a REDD headline that Azure may publish FY22 financials by mid-October. There were no updates from company itself.

Genting continues to widen and GENTMK 4.86 06/08/27 has widened another 30bps so far today. A successful bid for the Macau concession could force the company to rely on debt funded growth, rather than deleveraging, not good for existing bondholders.

The rain, or lack of it, in Yunnan has become a topic. Yunnan is a major hydropower producing province in China, and hydropower accounted for 84% of Yunnan’s installed electricity output in 2021. Precipitation has been 50% lower than previous years for the last couple of months and some hydropower plants are having to rely on stored water to generate electricity. Aluminium smelters were ordered to cut production by 10% and it is expected that more compulsory cuts will follow. Similar issues are affecting neighbouring province Sichuan, famous for its spicy cuisine, where all industrial activity was halted last month.. Silicon, and solar power manufacturing could also be affected.