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US Treasury yields dropped by 3-8bp across the curve, continuing their down-move from Tuesday. US consumer confidence increased to a five-month high in December to 110.7, from a downwardly revised 101.0 in November, indicating growing optimism about business conditions and the labor market. US existing home sales rose 0.8% in November to a seasonally adjusted annual rate of 3.8mn units, ending the declining trend of the last five months, against estimates of a 0.4% drop. Patrick Harker, President of Federal Reserve Bank of Philadelphia indicated that the central bank should begin to reduce interest rates slowly, offering a softer pushback against widespread market expectations of early-2024 cuts. US credit markets saw IG CDS spreads widen by 2.6bp while HY spreads widened by 8.6bp. US equity markets witnessed a sharp drop with S&P and Nasdaq falling by 1.5% each.
European equity markets ended mixed. In credit markets, European main CDS spreads were 1.2bp wider and crossover spreads widened by 2.2bp. Asian equity markets have opened broadly weaker today. Asia ex-Japan IG CDS spreads were 0.5bp tighter.
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A Formosa bond is a bond that is issued in Taiwan by a foreign issuer that is denominated in a currency other than the New Taiwanese Dollar. It is a way for foreign issuers to raise capital in Taiwan. To qualify as a Formosa, borrowers must have credit ratings of BBB or higher. Formosa bonds are listed and traded on the Taipei Exchange.
On Rate-Cut Bets Lifting Treasuries and Global Bonds
Tom Porcelli, chief US economist at PGIM Fixed Income
“Our view is “that the Fed does cut a few times next year, that growth does slow down – sort of 1% — which will look and feel pretty recessionary for some people. When I think about the next year or two, I don’t really see any meaningful catalyst to sort of break us out of what could be a really sluggish growth backdrop.”
Philadelphia Federal Reserve President Patrick Harker
“I’ve been in the camp of, let’s hold rates where they are for a while, let’s see how this plays out, we don’t need to raise rates anymore. But looking ahead, it’s important that we start to move rates down. We don’t have to do it too fast, we’re not going to do it right away, it’s going to take some time.”
John Graham, professor of finance at Duke’s Fuqua School of Business and director of the CFO survey
“There will be a bit of a strain on companies having to pay that higher interest rate. But companies expect interest rates to moderate.”
Sonya Ravindranath Waddell, vice president and economist at the Richmond Fed
“The probability that firms assigned to a decline in economic activity has fallen considerably since the beginning of the year. That, combined with the increase in optimism, “is a positive development for the business outlook for 2024.”