Daily Brekkie Bond Wrap
Despite a firmer macro backdrop, Asian credit started the week on a weak tone, as lower commodity prices led by oil, weighed on sentiment. There was some selling in the low beta names while triple-Bs held up better as dealers remained light on inventory. The new Petronas bonds leaked 2-3 bps wider, but bottom-fishing brought them back to flat on the day.
Lower oil prices pushed down prices on the Industrials and oil-related names, while Chinese property bonds held up relatively better. There was more noise in the Kaisa space on these headlines : “Sunac Said to Find Kaisa Unprofitable in Takeover Due Diligence”. Bonds immediately traded down on the news, but subsequently rebounded on a couple of lifts in the street. Bonds will continue to be volatile as lawyers representing the Steering Committee of large bond holders responded to Kaisa on the unfavourable restructuring terms for the bondholders. Expect more gamesmanship from all parties in the days to come.
With the strong overnight rally in all developed stock markets, expect spreads to grind tighter as we head closer to the FOMC announcement (early Thursday morning our time, just before Barcelona v Man City for anybody watching the game). Whether they keep the ‘P’ word or not in the statement is, I think, not as crucial as how they word it. My gut feel is that markets have been a bit too bearish heading into FOMC, and that Yellen & Co. could surprise with a somewhat dovish statement, citing significant slack still present in labour markets, notwithstanding the drop in the unemployment rate, meaning that they would not be in a hurry to raise rates yet. This could be the catalyst for a resumption of a risk-on market. Good luck!