Fixed Income Weekly: Bond Markets Firm amid FOMC Blackout
FOCUS OF THE WEEK
USD Rates: Rising real rates. A key factor we look at as we gauge the level of policy restrictiveness is implied real yields. Implied 1Y and 2Y real yields are now above 3.2% and 2.3% respectively. This is extremely tight if we assume that neutral real rates should be in the 0.5-1.0% area. Note that these real yields are also close to cycle highs and have picked up significantly over the past two months, as banking sector worries abate. Interestingly, the broader market has been resilient (seemingly mirroring that of the real economy). Despite the surge in short-term real yields, financial conditions are not stressed. Looking at the performance of the stock market and credits, it feels more like a risk-on environment. However, we hesitate to interpret the markets such a straightforward manner.
Looking out the next two weeks, the best-case scenario for risk would be weak CPI print, allowing the Fed to stay relatively dovish. The Fed might then opt to pause and perhaps put just one more hike in the dot-plot for optionality. A firm CPI figure would almost certainly lead to a rise in both nominal and real yields, perhaps pushing monetary restrictiveness to the threshold where risk takes a tumble.
Credit spread movements. Credit spreads tightened across most major markets, most significantly in Asia HY and AT1s, while IG spreads remained relatively flat week-on-week.
UST Implied Real Yields and S&P500
Source: Bloomberg, DBS
MARKET ACTIVITY & PIPELINE OBSERVATIONS
Asia ex-Japan USD primary market activity remained constructive in the week ending 2 June with a total of USD3.05b printed across three transactions.
Hong Kong SAR returned to markets with a multi-tranche transaction across USD, EUR, and CNH, following its print early this year.
The USD tranche saw USD2.5b being printed across the 3, 5, and 10Y tenors with healthy oversubscription levels. Korea prints also generated volume in the Asia ex-Japan USD markets with The Export Import Bank of Korea coming to market with a USD500m 10Y print with subscription levels over 4.4x. The respective new issue concessions and subscription levels of deals printed in the week ending 2 June again showed that high quality papers continued to be sought after and absorbed by investors.
USD secondary markets started the week ending 2 June quiet, with US and UK out on holiday. Asia IG spreads were a couple of bps tighter on the back of the progress of debt ceiling discussion talks. Chinese SOEs saw better buyers in the bullet space, with perps seeing some selling in CHPWCN and CHCOMU. The tech space was quiet but grinded 1-2 bps tighter. The recently issued BOCAVI 5Y and 10Y bonds continued to grind tighter (2-3 bps tighter) to start the week.
The announcement of the new HSBC 6NC5 saw a heavier trading tone in the financials space, with financial Tier 2s trading lower (across European and Aussie names), on profit-taking/ switching flows. Retail flows also started the week lighter in the financials space, with focus mainly on the new HSBC primary deal. However, there remained two-way flows across a host of non-financial seniors and corporate perpetuals. Free-to-trade HSBC papers saw month end rebalancing/switching flows from institutional accounts. The new HSBC opened higher with sellers taking profits on their early gains, before retail investors came in to top up their allocations. Better buying interest was seen throughout the session.
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