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Bond Market Insights - Wed, 27 Sept 2023

US Treasury supply kicked off with a $48b 2yr auction which went fine, stopping at 5.085%, which is the highest 2yr stop since 2006. Short end futures consolidated, but there is pressure out along the curve in the blues and golds, or 4yr and 5yr dated contracts. SFRM7 (June ’27) dipping below 96.00 for the first time. Today we get $49bn 5yrs and $24bn 2yr FRN to play with.


Data was mixed and had only limited impact. FHFA and S&P CoreLogic data showed house prices were holding up well. August New Home Sales were down, -8.7% at 675k vs 698k expected and Consumer Confidence fell more than expected to 103.


Affairs in Washington remain in the background for the moment, as a government shutdown looms in the absence of a budget agreement by the weekend. According to law, the U.S. Congress must pass 12 annual appropriations bills before the start of each new fiscal year on October 1st to provide funding for various government agencies. If Congress fails to pass these bills in a timely manner, federal agencies must cease all non-essential functions. There have been 22 shutdowns since this process was established in 1976, the shortest lasting a day and the longest being the 35 day shutdown under his awesomeness Trump in 2018. The current issue is a fallout from the debt ceiling crisis in June. Although Biden and McCarthy reached an agreement on the debt ceiling, suspending it until January 2025, some conservative Republicans have reneged, demanding another $120 bn in budget cuts.


Unlike the debt ceiling crisis, where the federal government lacks funds, a government shutdown, the law prohibits appropriations, but essential functions of the government such as the postal service, healthcare, military, and the criminal justice system continue to operate normally. The U.S. Treasury can also to pay off debts and social security and Medicare payments are made as usual. The impact of a government shutdown on the economy is smaller.


Equities didn’t fare so well and VIX closed at the highest level since May, at 19, as the mega-caps weighed on the market. Positioning on the Nasdaq 100 is now a one-sided net short of $8.1 bn, according to Citigroup.


On to Asia. Adani Ports announced tender for up to USD195m of its USD520m outstanding 2024 notes. Two Chinese issuers announced the call of perpetual notes; China Grand Automotive (CHGRAU) is calling its USD261m 9.109% perps and China Jinmao will call its USD300m 4.875% sub perps, despite the current property crisis, perhaps signalling that it remains an important SOE subsidiary of Sinochem.


In Korea, potential geopolitical overhang relief for HYUELE as Yonhap reports that Samsung and SK Hynix may see indefinite extension of their waiver from US export restrictions to China.


In India HY, JSW Infrastructure’s ongoing India IPO oversubscribed on second day, while Moody’s downgraded Vedanta to Caa2 ahead of maturities.


Breakeven rates for 10yr Japan government inflation-linked bonds (JGBI 0.005 03/10/33) rose to 1.24%, the highest since November 2014, against a backdrop of rising oil prices and a weakening currency. Japan’s inflation hovered above the BOJ’s target for a 17th month in August, with prices excluding fresh food rising 3.1% from a year ago. Despite the market anticipating the abolition of the yield control actions in the long end of the market, the 3-month forward Overnight Index Swap (OIS) rate is stubbornly stuck at 0.02%.


Philippine Central Bank Governor, Eli Remolona, indicated a potential unscheduled interest-rate hike before the official November meeting, reinforcing his firm stance on monetary policy. He dismissed any possibility of policy rate cuts during the first half of 2024. The current benchmark interest rate remains at a 16-year peak of 6.25%. If challenges arise from energy and transportation costs, there might be a 25-basis point increase in borrowing rates by November 16. He is committed to bring inflation within the 2%-4% target by 2024, evat the expense of economic growth.

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