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US Treasury yields fell sharply across the curve after a dovish FOMC meeting, with the 10Y yield dropping below the 4%-mark, the first time since July. While the Fed kept the Fed Funds range unchanged as expected at 5.25-5.50%, policymakers penciled in no further interest-rate hikes in their projections for the first time since March 2021. Instead, the Fed’s dot plot showed policy members pricing-in 75bp of rate cuts for 2024, a sharper pace of cuts than signaled in September. In comparison, markets currently are looking at 100bp in rate cuts next year, as per Fed Fund Futures data.
The US 2Y yield dropped by 37bp to 4.36% and the 10Y yield fell 22bp to 3.98% following the FOMC decision. As seen in the chart below, the yield curve has shifted significantly lower since the 10Y yield touched the 5% mark in late October, the highest levels this year. The 10Y yield is now down over 100bp from its highs seen on October 25.
US credit markets saw IG CDS spreads tighten by 4.3bp and HY by a sharp 27bp. The fall in benchmark yields have been accompanied by a strong tightening in credit spreads – US IG CDS spreads are at 55bp, its tightest levels since March 2022 and HY spreads are at 365bp, its tightest since April 2022. With the dovish FOMC and the sharp drop in Treasury yields, US equity markets ended significantly higher on Wednesday with the S&P and Nasdaq up 1.4%.
European equity markets ended near flat. In credit markets, European main CDS spreads were 1.9bp tighter while crossover spreads tightened by 11.1bp. Asian equity markets have opened in the green today. Asia ex-Japan IG CDS spreads were tighter by 4.4bp.
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The Fed dot plot is a visual representation of interest rate projections of members of the Federal Open Market Committee (FOMC), which is the rate-setting body within the Fed. Each dot represents the Fed funds rate for each year that an anonymous Fed official forecasts. The dot plot was introduced in January 2012 in a bid to improve transparency about the range of views within the FOMC. There are typically 19 dots for each year, representing the median rate of each voting member on the committee.
On Pakistan reforms helping bonds but political risk lingering
Shaoyu Guo, a sovereign analyst at T Rowe Price
“Pakistan sovereign bonds were pricing in a default back in May-June this year, so the restoring of some resemblance of political stability and the resumption of IMF funding were a thesis-changer for many”
Philip Fielding, co-head of EM debt at MacKay Shields
“Pakistan has performed of late as the market started to fully appreciate the impact of the structural reform agenda that was implemented under the guidance of the IMF”
On AT1s back from the brink, but challenges remain
Puneet Sharma, head of market strategies at Zurich Insurance Group
“We expect a high risk of recession in the U.S., European growth is also likely to be lackluster. In such an environment, it is hard to just say banks are out of the woods completely”
Joost Beaumont, ABN AMRO’s head of bank research
“AT1s are closest (in performance) to equities and for next year we expect higher funding costs for banks. Banks’ loan-loss provisions are likely to rise because the economic backdrop is very weak and markets also price rate cuts”
Mark Geller, global head of banks debt capital markets at Barclays
“Where we sit today versus where we were prior to the market volatility in March, and actually for the AT1 product over several years, the investor base has been remarkably consistent”
On Credit Rally Extending on Dovish Fed With Spreads at 22-Month Low
Mark Reade, head of fixed-income desk research at Mizuho Securities
“The path of least resistance for Asian credit spreads is tighter as we head into year end… we doubt 2024 will be smooth sailing for Asian credit investors”