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Bond Market Insights - Wed, Mar 15 2023

The US February CPI data came in a bit stronger than expectations, with headline and core rising by 0.4% and 0.5% respectively from January. In general, the composition was as expected, strength evident in most goods and rentals still elevated rental while medical services declined, other core services gained. The yoy headline inflation rate fell by 40bps to 6.0%, while core ticked down to 5.5%.

If not for the current turmoil in the banking sector this would have encouraged the Fed to re-accelerate the pace of hikes, starting with this month’s meeting.

Government bond curves in US and Europe are see-sawing on sentiment. The US 2yr note put in a 57bp range from spike to the highs of 3.82% (lows in yield) on the Credit Suisse news, to the lows of the day of 4.39% early in the afternoon when everything was seemingly beginning to calm. The 2yr-3yr and 3yr-5yr spreads whipped around in a 15-20bp range over the last two days. Steepening from 2yr to 5yrs has been seen during rallies and a clear flattening trend kicks in when the market sells off. Off the run bond issues are pretty illiquid, bid/ask spreads blowing out 2-3x what they were a week ago.

The price action in Asia today was in sharp contrast with the week so far, which saw de-risking across the spectrum. Spreads are 2-5bp tighter across quality names, 3-7bp tighter in beta issues. The new BNKEA and SHCMBK issues recovered well today, having been beaten up by FM and the street at the start of the week.

India IG spreads tightened 3-8bps, leaving them just 10bps wider on the week. China High yield is up a point, Macau gaming up as much as 2pts.

Moody's has been quick to circle the carnage of the last few days,, cutting its outlook for the US banking system to negative from stable, citing a "substantial decline" in depositor and investor confidence.


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