Global fixed-income markets Report Interpretation

Overview

This global fixed-income weekly examines whether the rise in US yields is nearing its limit and traces the consequences through Mexico, Europe, China, EM rates, the UK and covered bonds. HSBC's central view is constructive on duration after recent yield increases but selective where easing expectations, fiscal supply, inflation or China-related growth risks remain unresolved.

Core views

HSBC argues that the recent rise in US Treasury yields should not be read primarily as a durable repricing of the Federal Reserve path. Strong US data and hawkish interpretation of the July FOMC minutes lifted yields, and the 30-year yield moved from 4.25% to 4.4%. Yet year-end fed-funds futures were little changed and December 2024 SOFR futures returned to 4.25% from below 4% earlier in the month, leaving the 2024 rate outlook broadly unchanged from the start of August. HSBC therefore attributes the move in longer maturities more to liquidity or supply concerns than to Fed expectations; limited movement in longer-maturity breakevens supports that reading. On longer-run fundamentals and valuations, it sees yields as a buying opportunity, although it expects patience and near-term choppiness. The firm expects the 30-year Treasury yield to consolidate in a 4.0-4.5% range, with the 10-year range modestly below it. It views this as a reasonable post-Silicon Valley Bank equilibrium and argues that nominal GDP expectations around 4% should provide a soft ceiling for the 5Y5Y forward, which ended the prior week at 4.09%. Elevated University of Michigan inflation expectations remain inconsistent with the FOMC's objectives, but HSBC expects one new data point to be insufficient to alter the FOMC's stance. It expects investors to await improved liquidity after the summer period before making larger moves. Higher Treasury yields have transmitted into Mexico, where local rates have repriced higher and the curve has steepened in a bearish fashion, especially at long maturities. Numerous government-security auctions and debt switches beyond the quarterly issuance schedule added supply pressure. Expectations for easing have fallen sharply: only about 6bp of easing was priced for the November central-bank meeting, and forwards suggested the first Mexican rate cut might not arrive until late in the first half of 2024. In the eurozone, the 10-year Bund yield had moved between 2.46% and 2.71% in August and was at the upper end of that range; HSBC's cited rates view expected it to fall to 1.75% by year-end 2023 under a lower-for-longer outlook. In China, foreign equity inflows following the 24 July Politburo meeting had reversed as investors judged policy support too gradual, particularly because concrete first-tier-city property easing details had not emerged. The PBoC cut the seven-day reverse repo rate by 10bp and the one-year MLF rate by 15bp to lower financing costs. The unchanged five-year loan prime rate does not, in HSBC's view, necessarily negate mortgage relief: while narrow bank net interest margins constrain lending-rate cuts, the authorities can lower household mortgage costs by pushing banks to cut rates on legacy mortgage loans. The one-year LPR, used for household consumption and corporate loans, was reduced by 10bp that month, while the five-year LPR used as a mortgage benchmark was unchanged. HSBC distinguishes Chinese municipal bonds from LGFV bonds. Municipal bonds are explicitly issued by local governments, whereas LGFV debt is effectively corporate debt reliant on implicit local-government support. LGFV credit differentiation deepened in 2022 after some provinces suffered sharp land-sale-income declines, while municipal spreads remained narrow versus central-government bonds and across provinces. HSBC considers the municipal-spread tightness supported by strong demand for relative safety as property-sector struggles reduced bond issuance, likely moderation in municipal supply because of high local-government debt, and central-government income redistribution that cushions weaker provinces. For LGFV debt, it continues to see refinancing through lower-cost, longer-tenor rollovers as the practical route, judging both net repayment and widespread defaults infeasible given local-government finances and financial-stability risks. It notes speculation over a potential RMB1.5trn additional municipal-bond quota to refinance some LGFV debt and a positive LGFV-bond response to that news and benchmark-rate cuts, but stresses that local governments will mainly remain responsible for refinancing. For developed-market credit, HSBC expects Europe to be more exposed than the US to weaker Chinese demand because of closer eurozone-China trade links and European companies' reliance on Chinese sales. It favors defensive sectors and financials over cyclical sectors such as autos, miners, chemicals and luxury goods. Chinese chemical oversupply in Europe has already pushed prices lower and weakened European chemical-company margins. Although European bank non-performing loans should rise as growth slows, HSBC considers this largely priced in from a low starting base. It sees the spread differential between financials and non-financials, at just over 60bp, as too wide versus an estimated fair value near 30bp, and would scale back its financials overweight as that level is approached. Deposit competition could pressure bank net interest margins and reduce protection against higher NPLs, but HSBC sees headroom after sharp NIM expansion and notes that money-market-fund alternatives make US deposit competition fiercer than in Europe. Across EM, HSBC finds potential duration opportunities in selected long-dated swap forwards where forwards appear too high, including markets that have experienced large increases from pre-pandemic lows such as Hungary, Brazil, Poland, the Czech Republic, Israel and Korea. It notes that forwards remain below their 2013 taper-tantrum peaks in most markets except South Africa and the Czech Republic. Still, it urges selectivity: EM local debt and external debt had returned -3.12% and -2.8%, respectively, in August to date, led by Latin America and CEEMEA. Many markets, particularly in those regions, still priced aggressive policy easing; rising EM-debt-fund redemption pressure and historically weak August-September seasonality for EM local debt add to the caution. In India, INR overnight-indexed-swap forwards implied overnight rates would remain 30bp above the policy rate through year-end, reflecting a hawkish inflation narrative. HSBC expects the RBI to favor liquidity tools, including the incremental cash reserve ratio introduced at the August MPC meeting, rather than respond to higher food prices with a policy-rate increase; the 24 August MPC minutes were identified as a source of further inflation-assessment signals. In Thailand, HSBC expects attention to turn to the timing and scale of the FY24 budget once a new government is formed. The outgoing government proposed a THB593bn FY24 deficit; a materially larger deficit could pressure government bonds, especially as long-dated auctions were already receiving fewer bids. It expected cabinet formation about a week after a prime-ministerial candidate secures parliamentary support and budget details about a month later. For the UK, headline CPI fell to 6.8%, but sticky core inflation and upside wage surprises led markets to fully price another September hike and to assign some probability to a 50bp move. HSBC also sees evidence that tightening is working: unemployment rose unexpectedly, while vacancies and candidate availability indicate labour-market loosening. It believes the Bank of England is relying on backward-looking data and favors buying on weakness at the front end, specifically receiving GBP 2Y1Y OIS, because near-term hawkish risk is already well priced. The open idea had a 4.70% entry level, 3.80% target, 5.40% stop and 4.98% last level as of intraday 21 August. Finally, covered-bond secondary-market turnover remained very low, but primary issuance restarted unusually early after the summer break. Two benchmarks were issued in the prior week with good demand; two further EUR benchmarks appeared on 21 August, and three EUR new issues plus a GBP transaction were scheduled for 22 August. HSBC sees this activity as evidence of banks' strong funding needs. It expects September and October to be busy for primary issuance, but expects supply through year-end to be considerably lower than in the first half because many issuers have already pre-funded.

Analysis framework

HSBC uses cross-market comparisons of yield moves, rate futures, breakevens, forward rates, spreads, policy expectations, issuance conditions and macro indicators. It then links those indicators to duration, curve, credit-sector and country-specific implications, while distinguishing explicit government obligations from quasi-government credit risk in China.

Methodology notes

• Fixed Income and CreditYield curve analysis

  Analysis of Treasury, Bund and local-market yield levels, curves, futures and forward rates.

  HSBC compares changes across maturities and uses implied policy paths and long-run rate anchors to judge whether yields have overshot and where duration may be attractive.

• Fixed Income and CreditSpread analysis

  Comparison of municipal versus central-government spreads and European financial versus non-financial credit spreads.

  The report uses spread levels and expected convergence to assess relative credit value and the effect of China-related growth risk.

• Industry AnalysisSupply-demand framework

  Supply-demand explanation for Chinese municipal-bond spreads and covered-bond primary issuance.

  HSBC relates safe-asset demand, constrained municipal supply, bank funding needs and pre-funding to pricing and issuance conditions.

• Financial-sector metricsNet Interest Margin (NIM) Analysis

  Bank net interest margin effects from deposit competition and mortgage-rate reductions.

  The report considers NIM pressure as both a constraint on Chinese lending-rate cuts and a potential buffer or vulnerability for European bank credit.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• US Treasuries

  HSBC views higher yields as a buying opportunity and expects consolidation before a decline.

  Strengths

  Longer-run fundamentals and valuations support the view that yields have risen far enough.

  Weaknesses

  Near-term trading is likely to remain choppy until the economic outlook and market liquidity become clearer.

  Comparison

  The move is linked more to liquidity or supply concerns than to a material change in the Fed outlook.

  Risks

  Inflation expectations remain above levels consistent with FOMC objectives.

• European financial credit

  Preferred over cyclical non-financial European credit amid China-related growth risk.

  Strengths

  NPL risk starts from a low base and is viewed as largely priced in; spreads remain wider than HSBC's estimated fair relative level.

  Weaknesses

  Deposit competition could compress NIMs.

  Comparison

  HSBC prefers financials and defensives over autos, miners, chemicals and luxury goods; the financial/non-financial differential is just over 60bp versus estimated fair value near 30bp.

  Risks

  A slowing economy could raise NPLs and erode the earnings buffer from NIMs.

• GBP 2Y1Y OIS

  Open trade idea to receive the front end of UK rates.

  Strengths

  HSBC believes near-term hawkish risk is already well priced.

  Comparison

  Entry 4.70%, target 3.80%, stop 5.40%, and last level 4.98% as of intraday 21 August.

  Risks

  Persistent inflation pressure.

Key data

• US 30-year Treasury yield4.25% to 4.4%Increase cited for the prior week; HSBC expects a 4.0-4.5% consolidation range.
• 5Y5Y forward4.09%Ended the prior week; HSBC views nominal GDP expectations around 4% as a soft ceiling.
• 10-year Bund yield2.46%-2.71%August range; cited HSBC view expected 1.75% by year-end 2023.
• PBoC policy-rate cuts7-day reverse repo -10bp; one-year MLF -15bpCuts made in the prior week as China sought to lower financing costs.
• Potential municipal-bond quotaRMB1.5trnNews speculation cited as potential refinancing support for some LGFV debt.
• European financials versus non-financials spread differentialJust over 60bp; fair value about 30bpHSBC expects to scale back its financials overweight as the differential approaches fair value.
• EM debt August returnsEM local debt -3.12%; EM external debt -2.8%August-to-date losses cited in the report.
• UK headline CPI6.8%Fell in the latest release, while core inflation and wages remained hawkish signals.
• Thailand FY24 proposed budget deficitTHB593bnA significant increase beyond this amount could pressure Thai government bonds.

Impact & implications

HSBC's conclusions favor a cautious but constructive duration stance after the rise in developed-market yields, coupled with discrimination across EM and credit. China-related weakness is presented as more consequential for European cyclical credit than for the US, while policy delivery, fiscal supply and inflation determine the main regional risks.

Risks

• US inflation expectations remain elevated and could sustain hawkish monetary-policy concerns.
• China policy support may continue to disappoint investors, particularly if property measures remain unclear.
• A larger-than-proposed Thai FY24 fiscal deficit could add pressure to government bonds.
• EM markets may remain vulnerable because aggressive easing is still priced, fund redemptions are rising and August-September seasonality is weak.
• European bank margins could come under pressure if deposit competition intensifies, reducing protection against higher NPLs.
• Persistent UK inflation could keep the Bank of England more hawkish than HSBC's front-end rates view assumes.

What to watch

• US data, FOMC interpretation, inflation expectations and the return of market liquidity in September.
• Concrete Chinese property-policy measures, mortgage-rate reductions and LGFV refinancing support.
• The 24 August RBI MPC minutes for signals on India's inflation assessment.
• Thai government formation and the size and timing of the FY24 budget.
• UK inflation and labour-market releases before the late-September MPC meeting.
• European financial-versus-non-financial spread convergence and deposit-rate competition.
• Covered-bond primary-market activity in September and October.