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Bond Markets Insights - Thurs, 07 Dec 2023

Weaker Oil prices supported US Treasuries with WTI falling below $70 for the first time since early July; CL 1 is now -10% from last week’s highs. The long end of German Bunds, UK Gilts and UST’s was well bid, while the short end was anchored at 4.60%, already aggressively positioned for rate cuts. Real money and CTA demand was reported as 30yr yields slid through 4.22%, down 32bps from last weeks highs and 91bps from October’s peak. 2s10s flattened to -49bps, -16 from last week’s highs. 5s30s flattened to +10 which was -18bps from last week’s highs. All big moves. What’s priced in? March rate cut odds were little changed, holding around 60%, a little over 50bps.

Data had a minimal impact, Nov ADP was +103k vs 130k est; ADP reported continued moderation in wages. Revised Q3 productivity garnered a little more attention, moving up to 5.2% from 4.7% with ULC revised lower to -1.2% from -0.8%

A lot of rates banter out of Europe. ECB's Kazimir, typically a hawk, said further rate hikes are unlikely, but the markets pricing for Q1 cuts is "science fiction". ECB's Kazaks carried on in a similar tone, saying that currently there is no need to cut rates in H1-2024, although he hedged that slightly adding that if situation changes, decisions "might change".

BoE's Bailey was a bit more strident when describing his bailiwick, stating that the "Full effect" of higher rates yet to hit UK, but borrowers "remain resilient" to higher rates.

Moody’s was out with the red pen again. Having downgraded the outlook of China sovereign it was now the turn of 8 major banks and 26 of the government favoured LGFV’s. They also downgraded the outlook for Macau and Hong Kong, citing concerns about the diminishing autonomy of HK’s political and judicial institutions following the implementation of the National Security Law. The market impact of the outlook changes has been limited.

Back to the US, Goldman's Scott Rubner opined from his vantage point in Palm Beach that "The flow-of-funds dynamics that caused the everything rally in November have absolutely run out of gas right now," describing $225bn in CTA buying over the last month as "the fastest increase in exposure that we have ever seen." All eyes to non-farm payrolls on Friday.


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