Fed vice chair Brainard (generally considered to be one of the more pragmatic members) was hawkish in her comments on the Fed’s balance sheet run-off plans, spooking an illiquid US Treasury market. After the FOMC minutes were released, the market stabilized as it now has clear guidance from the Fed that they are committed to neutralizing monetary policy using a combination of rate hikes and balance sheet run-off.
If the Fed were to hike 50bps at the May and June meetings and 25bp at each subsequent meeting over the year, Fed funds would attain the 2.25%-2.50% range by year end. The balance sheet run off could start in May and maybe capped at $60 billion for Treasury securities and about $35 billion for agency MBS, larger and faster than in 2017. The Fed holds $326bn of treasury bills on its balance sheet, maturing T- bills will constitute a significant portion the taper. As the runoff continues the financial system might need to absorb longer duration debt, resulting in steeper curves.
Credit spreads have been resilient, despite volatility. Asia IG compressed around 7bps while HY continued to perform in the face of downgrades in the China property sector. Asia IG is now only 15bps wider year to date. Reports that Chinese regulators were considering giving US full access to audits of most firms, and that a decade-long rule restricting offshore-listed firms’ financial data sharing was modified to facilitate further progress on the issue emerged early in the week gave TMT a boost, although there was continued selling of 10yr paper in New York for most of the week.
Asia-Pac US$ new issues amounted to $9.3bn this week, $8bn of Asia-ex, $2.3bn Japan and USD2.2bn from Australia. China US$ primary continued to be dominated by LFGV’s, while Power Construction came out with a US$500mm at 4.25% subordinated perpetual 45bps tighter than initial price talk and was met with a solid reception from investors, despite the low premium of perps over bullets currently. PT Freeport Indonesia (PTFI), a JV between Indonesian state miner Inalum and US diversified miner Freeport McMoRan (FCX) issued a jumbo debut bond, $3bn across 5’s, 10’s and 30yrs.The combined orderbook was 5x oversubscribed at USD15bn, over half of it being sold to US accounts. Shinhan Bank sold $500mm 4.375% 2032 Green notes which was well received at 4x oversubscribed.
The rating agencies are out again with S&P telling us that China's property downcycle is not over. Moody’s downgraded Redsun a notch to Caa1, with a negative outlook. Times China and Zhongliang were downgraded to B3, S&P downgraded Agile and KWG to B- and Roadking to B+. Developers still face pressure on cashflow due to declining sales, tight regulations on property presales proceeds and a lack of interest in M&A by state-owned enterprises. It is estimated that a total of CNY 1.1 trillion ($172bn) of bonds and asset-backed securities will mature in 2022, with lower ratings and an inability to refinance we have a long way to go.
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