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US Treasury yields were stable on Friday after a volatile week. The US Congress managed to avert a government shutdown just in time whilst passing a legislation to keep the government running until November 17. The peak fed funds rate rose 3bp to 5.46%. In credit markets, US IG CDS spreads were 0.8bp wider while HY spreads widened 7.8bp. US equities were mixed with the S&P down 0.3% and Nasdaq up 0.1%.
European equity markets ended slightly higher. In credit markets, European main CDS spreads were tighter by 0.6bp and crossover spreads tightened 2.5bp. Eurozone inflation fell to its lowest level since October 2021. Eurostat’s flash inflation reading came at 4.3% in September, down from 5.2% a month prior. Meanwhile, core inflation fell to 4.5% from 5.3%, the biggest drop since August 2020. Analysts note that the above drop likely implies that inflation has reached its peak in the region. Asian equity markets have opened mixed this morning. Asia ex-Japan CDS spreads were 0.4bp tighter.
Tuna Bonds were bonds issued by Mozambique in 2013 to finance Mozambican state-owned fishing company EMATUM’s plans to develop tuna fishing. However, several hundred millions of dollars went missing and donors including the IMF stopped supporting the nation leading to a currency and debt crisis. Credit Suisse, which helped facilitate the transaction is set to face a trial after funds from the tuna bond issuances were used for purchasing military equipment instead.
Credit Suisse and Mozambique have secured an out-of-court ‘tuna bond’ settlement.
On Once Unthinkable Bond Yields Now the New Normal
Frederic Dodard, head of asset allocation at State Street
“What happened over the last few months was basically markets were wrong because they thought inflation would come down quickly and central banks would be very dovish… Everything will depend about how inflation lands over the medium to long run”
Adam Kurpiel, rates strategist at SocGen
“Rebuilding term premium can only feed long-end steepening forces. It looks like the pain trade of even higher yields could continue.
until something breaks.”
Jack McIntyre, PM at Brandywine Global
“I think we are in the fear stage for Treasuries, and that won’t last. In our mind, inflation is settling and growth will slow. We will get there in six months”
On Goldman, HSBC Cautious on One of Year’s Hottest EM Trades
Caesar Maasry, Goldman’s head of EM cross-asset research
“The rates cushion between EM and US has exhausted”… the premium between local-currency debt maturing in five years and dollar bonds issued by those same emerging economies has disappeared… “It’s more tricky here to be bullish on the EM tactically”
On central bank may be done with rate rises – FRBNY President, John Williams
“My current assessment is that we are at, or near, the peak level of the target range for the federal funds rate. I expect we will need to maintain a restrictive stance of monetary policy for some time to fully restore balance to demand and supply and bring inflation back to desired levels… Although inflation has come down from the peak reached last year, it is still too high”
On Market Stress Rising Over Wild Week Ahead Even Without a Shutdown
Brian Donlin, equity derivatives strategist at Stifel Nicolaus & Co
“We just have a lot of questions that are on people’s minds. You’ve seen a bit more hedging, a bit more risk of a real vol spike”
Bram Kaplan, head of Americas equity-derivatives strategy at JPMorgan Chase
“While investor anxiety may be rising, it is likely only doing so moderately and doesn’t feel like a panic”