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US Treasuries saw a sharp sell-off led by the short-end of the curve. The 2Y yield soared 20bp and the 10Y was up 17bp after a strong jobs print and Jerome Powell hinting at an unlikely March rate cut. US Non-Farm Payrolls (NFP for January 2024 came at a strong 353k, much higher than expectations of 185k and also above the prior month’s upwardly revised 333k. Average Hourly Earnings (AHE) YoY rose by 4.5%, much higher than expectations of 4.1% and the prior month’s upwardly revised 4.3% reading. The unemployment rate held steady at 3.7%.
Fed Governor Michelle Bowman on Friday, said she expects US inflation to decline further, albeit flagging worries about upward price pressure from rising wages and warning against cutting rates too soon. Also, Fed Chairman Jerome Powell in an interview noted that Fed officials wanted to see more economic data to ensure that inflation is on a sustainable path towards their 2% goal. Looking at credit markets, US IG and HY CDS spreads tightened 10.5bp and 2.7bp respectively. Equity markets saw the S&P and Nasdaq rise 1.1% and 1.7% respectively.
European equity markets ended mixed. Credit markets in the region saw the European main CDS spreads tighten by 2.2bp and crossover spreads tightened by 8bp. Asian equity markets have opened lower today. Asia ex-Japan IG CDS spreads tightened by 2.6bp.
Local government financing vehicles or LGFVs are debt-issuing entities set up by local governments in China to fund infrastructure and related projects. LGFVs came into existence because local governments were prohibited from raising debt directly. Hence, these local governments set up off-balance sheet entities known as LGFVs. LGFVs have become popular over the past decade and are regular issuers of Chinese yuan and US dollar bonds. While these issuers are backed by local governments, there are concerns among investors about their ability and willingness to repay debt driven by events in the past when LGFVs defaulted on their bonds.
On India Ready to Tackle ‘Hot Money’ on Index Entry – Finance Secretary TV Somanathan
“Anything that would be enough to create domestic volatility” will be monitored… government will take “whatever action” is needed “to prevent hot money from coming in… don’t want the Indian economy to be controlled by unknown foreign factors, which we have no control over”
On Scarcity of New Issues Driving EM Corporate Bonds to Beat Their US Peers
Simon Cooke, a money manager at Insight Investment
“Much better starting valuations when compared to US corporates, lower supply than expected… series of buybacks and tenders and a supportive macro backdrop have combined to push emerging-market corporate bonds to the top”
Sergey Dergachev, head of EM corporate debt at Union Investment Privatfonds
“There are some interesting pockets of value.. offer great diversification in terms of country and sector exposure”
On Rate-Cut Bets Rattled by Powell Pushback, Jobs
Kevin Flanagan, head of fixed income strategy at Wisdom Tree Investments
“The Fed can deliver three to four rate cuts as the rate of inflation keeps coming down”
Sally Auld, CIO at JBWere Ltd
“We were pretty keen on 5% Treasury yields as probably the peak … harder to bang the table at 4% and say you should really be buying”