March 2024

FICC - UK Sovereign Bonds and Currencies Coverage

Gilt Performance:
From the beginning of the year, 10 Year Gilt yields rose 47 basis points to close at 4.21% by the end
of February. This came aAer the Bank of England forecast Q1 2024 GDP growth at 0.1%, following a
technical recession in the laIer half of 2023. Moreover, with an annualised rate of 4% in January, the
UK conPnued to suffer significantly higher inflaPon than any of its G7 counterparts. Despite this,
none of these peers had yet begun rate cuts, which reinforced market expectaPons of 'higher for
longer' interest rates in the UK.

However, though the Monetary Policy CommiIee voted to maintain interest rates at 5.25% again in
their March meePng, where they have remained since August 2023, Governor Andrew Bailey
signalled that rate cuts were “in play” for future meePngs stressing how small the preceding
recession was and the progress in fighPng inflaPon since its peak of 11.1% in October 2022. Indeed,
driven largely by food and non-alcoholic beverages as well as restaurants and hotels, the annualized
inflaPon rate fell to 3.4% in February, down from 4% in both January and December and beaPng
market expectaPons of 3.5%. Consequently, 10 Year Gilt yields fell 18 basis points from 4.21% on
March 1st to 4.03% by the end of the month.

Differing Performance of UK 10 Year Gilt Yields Between January-February and March

Source: S&P Capital IQ Pro

GBP Performance:
Following the unveiling of the 2024 Spring Budget on March 6th the GBP appreciated to nearly $1.29
by March 8th, a noPceable upPck from $1.26 at the beginning of the month. Most significantly, the
budget featured the announcement of the new BriPsh ISA which will allow investors the opportunity
to invest a further £5,000 in UK equiPes tax-free. However, this surge peaked against both the USD
and EUR by March 8th, as the downwards pressure of other macro factors prevailed. The February
inflaPon announcement and the accompanying signals from Governor Andrew Bailey on March 21st
was the most prominent domesPc factor with the GBP having contracted around $0.02 by March
25th. AddiPonally, the US Federal Reserve announcement on March 20th consisted of an upwards
revision to 2024 GDP forecasts to 2.1%, a significant increase from the 1.4% forecasted in December.
This decreases the chances that the US will fulfil their plan to cut interest rates 3 Pmes in 2024,
making the GBP a comparaPvely less aIracPve investment. By the end of March, the GBP had
contracted back to $1.26 USD and €1.17 EUR, the same rates at which it had begun the month.

USD per GBP

Source: S&P Capital IQ Pro

EUR per GBP

Source: S&P Capital IQ Pro

FICC - US Treasury Bonds and Currencies Coverage
10Y Treasury Performance
At the start of March, the US 10-year treasury yield was at 4.184% due to stronger than expected
inflaPon and employment data. We saw some mixed PMI data from February: with both the S&P
Global Manufacturing (52.2 vs 51.5) and Services (52.3 vs 51.3) PMI figures being slightly higher than
expected. The JOLTs Job Openings figure was quite a bit higher-than-expected at 8.863M versus the
expected 8.8M. Jerome Powell’s Congressional tesPmony in March was taken as more dovish than
expected by markets as it indicated that while he wanted to be paPent about the trajectory of
inflaPon, he was confident in the disinflaPon process which resulted in the 10-year yield dropping to
4.087%.

US 10-Year Treasury Yield

The February non-farm payrolls figure was higher-than-expected at 275K, whereas the
unemployment rate rose to 3.9%. February also saw slightly hoIer inflaPon data with CPI year-on-
year at 3.2% - this resulted in a weaker 10-year note aucPon, but there was a slightly stronger 30-
year bond aucPon. As expected, the Federal Reserve held interest rates at the current 5.25-5.50%
range. The GDP growth rate quarter-on-quarter in Q4 was again stronger-than-expected at 3.4%. The
Federal Reserve’s preferred gauge of inflaPon, the Core PCE Index, was in-line with expectaPons at
2.8%.

As a result of resilient US economic data, markets have priced the first interest rate cut in June with a
probability of 46.2%, whereas the probability to hold is at 52%. This is in large part thanks to the
303K March non-farm payrolls figure, which was wildly higher than the expected 212K; the
unemployment rate was slightly lower at 3.8%. US Treasury yields soared and as it stands, the 2-year
yield is 4.78% and the 10-year is at 4.45%.
US 2-Year Treasury Yield

USD Performance
USD has strengthened by 2.77% year-to-date according to the US Dollar Index. Due to the uncertain
economic outlook, it is difficult to say where the dollar might be headed. The strength of the
employment data makes it harder to follow a certain disinflaPon narraPve. Overall, the Federal
Reserve is sPll commiIed to its 2% inflaPon target and will look to see more economic data before
making any changes to the current interest rate.

DXY Index
FICC - Chinese Sovereign Bonds and Currencies
Coverage
China’s near-term economic outlook appears promising, although long-term challenges remain. The
economy achieved a respectable 5.2% growth rate in Q4 2024, surpassing the government’s target
of 5%.

Our analysis suggests the economy may be nearing the bottom of the current cycle. We observe
early signs of a potential turnaround. Specifically, the industrial sector is exhibiting some signs of
strengthening.
China’s recent economic data offers mixed signals. Inflation, which previously dipped into negative
territory, has rebounded to 0.7%. This uptick stems primarily from price increases in Education,
Culture, and Recreation (3.9%) and Healthcare (1.5%).

On a brighter note, the Caixin PMI, a manufacturing index that better reflects activity among small
and medium-sized enterprises (SMEs), continued its upward trend. It rose to 51.1 in March, up from
50.9 in February, indicating expansion in the manufacturing sector.

In addition, the official manufacturing PMI, the measure that encompasses larger and state-owned
enterprises, has turned expansionary from 49.8 in February. The main contributors included the
production component, which rose from 49.8 to 52.2, and new orders, which jumped from 49.0 to
53, all signalling better prospects for the future.

Another challenge the Chinese government faces is the ever-increasing, off-balance-sheet local
government debts. Estimated at 66 trillion outstanding, the local government financing vehicle debt,
or LGFV debt, poses a credit risk as local governments are doing everything they could to avoid the
default crisis. A crisis, if triggered, would be a GFC-level catastrophe for China.

The central government in China is also doing their bit. By swapping the hidden, off-balance-sheet
LGFV (Local Government Financing Vehicle) debts into government bonds, they are deemed safer
and it is term borrower-friendly. In the first two months of 2024, governments have stepped up their
spending to “diffuse“ the LGFV ticking time bomb. Its general public expenditure jumped 14% from a
year earlier to 482.8 billion yuan ($66.8 billion) in January and February combined, the fastest pace
for the period in five years.
The central bank might be helpful, too. An old speech by President Xi resurfaced recently, saying that
“(PBoC may) gradually increase the buying and selling of government bonds“, pointing to the
possibility of central banks conducting quantitative easing and absorbing a portion of government
debts, possibly to diffuse the hidden debt problem.

This came in stark contrast with the traditional position taken by the Chinese authority, who always
dismissed QE for its “moral hazard“ and “reputational impacts on monetary authority“.

At the end of the day, a robust recovery in 2024 hinges on positive developments across several key
areas. While encouraging signs in domestic demand, industrial activity, and export growth would be
welcome, they alone might not suffice. The focus remains on the CCP to unveil a significant stimulus
package that can:

1. Backstop and put a bandage on the property sector crisis, and subsequently its mounting
debt burden
2. Stimulate economic activity, particularly among Chinese consumers
FICC – Eurozone Bonds and Currencies Coverage
AAer several increases in the European Central Bank interest rate between 2023 Q1 and 2023 Q3, the
rate has remained at 4.50% since September 2023. The increases and high rates can be aIributed to
the high inflaPon rates aAer the implementaPon of fiscal and monetary sPmulus during the COVID-19
pandemic. With the central bank’s acPons, inflaPon has decreased from around 8.40% in March 2023
to 3.10% in January 2024. However, since the inflaPon rate is sPll higher than 2.00%, we expect the
central bank to keep the interest rate at 4.50% unPl the inflaPon subsides.

European Central Bank Benchmark Rate

4.75
4.55
4.35
4.15
3.95
3.75
3.55
3.35
3.15
2.95
2.75
23

23
23

23
3

4
23

24
23
23

23
23

02

02

0
20
20

20

20

20
0

0
0
20

-2

-2
-2

-2
-2

-2
1-

0-

2-
6-

5-

1-
10

11
0

09

16

15
-1

-1
-0

r-0

-1
l-1
-1

g-

p-
n-

n-

b-
ov

ec
ar

ay

ct
Ju
Ap

Au

Se
Ju

Ja

Fe
O
M

D
M

Source: S&P Global

European Union - CPI (Y-o-Y %) (Monthly)

9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
3

3
3
23

24
23

23

23

23
3

3
02

02
02
02

02

0
0

0
r-2

-2
-2
-2

-2
-2

-2

-2

-2
-2

-2

ct

ov

ec
n

n
g

p
l
ay
ar

Ju
Ap

Ju

Ja
Au

Se

O
M

D
M

Source: S&P Global

Even with the high interest rate, the real GDP of the European Union had been quite stable
throughout 2023, remaining above USD 13.80 million.

European Union - Real GDP (Quarterly)

13.84mm
13.82mm
13.80mm
13.78mm
13.76mm
13.74mm
2

3
2

2
20

20

20

20

20

20

20
2

4
Q

Q
C

C
Source: S&P Global

Euro Performance
Even though the price of the euro tends to rise with interest rate hikes as investors move to euro-
denominated investments, the exchange rate of the euro has fluctuated between 0.90 and 0.95 in
the last 12 months. This suggests that the euro market is relaPvely unpredictable, which may be
caused by the uncertainty of the central bank’s movements.

European Union - Exchange Rate (Monthly)

1.00
0.99
0.98
0.97
0.96
0.95
0.94
0.93
0.92
0.91
0.90
3
3

3
3
23

24
23

23

3
3

24
02

02

02
02

02
02
02

20

20
20

20

20
r-2
-2

-2
l-2

-2

-2
-2

n-

n-
g-

p-

b-
ct

ov

ec
ar

ay

Ju
Ap

Ju

Ja
Au

Se

Fe
O
M

D
M

Source: S&P Global

Bond Performance
The yield curve of AAA-rated government bonds in the European Union is inverted on March 5, 2024.
The yield is 3.85% today, and it is only 2.55% for 30-year bonds. Investors are shiAing their money from
short-term to long-term bonds, as evidenced by the fact that the interest rate on long-term bonds fell
below that on short-term bonds. This implies that market expectaPons on the near-term state of the
economy are growing increasingly negaPve.

Yield Curve of AAA-Rated EU Government Bond - 03/05/2024

3.85
3.65
3.45
3.25
3.05
2.85
2.65
2.45
2.25
0 5 10 15 20 25 30 35
Tenor

Source: S&P Global

The European Commission expects the real GDP growth rate of the European Union to be 0.9% in 2024
and 1.7% in 2025, while HICP inflaPon will experience a downward path from 6.3% in 2023 to 3.0% in
2024 and 2.5% in 2025. AAer the inflaPon rate is back to a normal level of around 2.00%, we expect a
rate cut from the central bank, which should then lead to an increase in bond prices and hence a
decrease in bond yields in the market. Following that, there is a chance that short-term interest rates
may surpass long-term interest rates, resulPng in an upward-sloping yield curve as opposed to an
inverted yield curve. At the same Pme, the demand for the euro may decrease, and hence the euro
may depreciate. However, as the global economic environment is sPll unstable, the effect on the euro
can be different from expectaPons.
Source: European Commission

Source: European Commission

FICC - Japanese Sovereign Bonds and Currency Coverage

For the first *me in 17 years, the Bank of Japan (BOJ) has li<ed its overnight borrowing rate
to a range of 0-0.1%, puGng an end to Japan's extended period of nega*ve interest rates.
This is primarily aKributed to a series of monthly core infla*on data recorded within a 2-
3.1% range within the past year, edging higher than target infla*on, as well as robust wage
growth crea*ng greater purchasing power. The reference yield i.e. Japan 10Y Government
Bonds maturing on 20th December 2033 traded on a discount of 98.78 Yen from 100 par
whilst correspondingly, the yield to maturity (YTM) on the same bond rose by 23%, reaching
0.73%, pivo*ng away from nega*ve territory during the YCC regime.

(Figure 1: Japan Government Bonds 0.6% expiring on 20/12/2033, Bloomberg Terminal)

Reference Ticker: JGB 0.6 20/12/2033 Corp

(Figure 2: YTM for Japan Government Bonds 0.6% expiring on 20/12/2033, Bloomberg
Terminal, Date: 01/04/2024)

Reference Ticker: JGB 0.6 20/12/2033 Corp

Following the recent rate hike, the BOJ will further reduce its monthly debt buying where
gross purchases are expected to fall below the amount of maturing debt for the first *me in
16 years where the shorYall is es*mated to be around -1.3 trillion Yen. Including the effects
of loss-averse investors, falling Japanese bond prices may create a steeper sell-off, puGng
upward pressure on yields given the inverse rela*onship between prices and yield.
(Figure 3: BOJ Quarterly Net Purchases of Bonds, Bloomberg Terminal, Date: 01/04/2024)

Despite ongoing concerns about the structural unaKrac*veness of short- and long-term
Japanese government bonds, which are currently trading below 1% and well below the
target infla*on rate, credit default swaps (CDS) have experienced a significant decline of
23.6% year-to-date, reaching $19.229. This decrease suggests that the market has priced in
lower default risk for Japanese credit, thus ins*lling confidence among investors that BOJ’s
YCC removal ensures long-term stability in Japanese credit. Unsurprisingly, this posi*ve
sen*ment is also reflected in the bullish trend of the Nikkei 225 YTD, nearly approaching the
40,000 mark.
(Figure 4: Japanese 5 year Credit Default Swap in USD, Bloomberg Terminal, Date:
01/04/2024)
Reference: JGB CDS USD SR 5Y D14

On the other hand, the USD/JPY has defied expecta*ons and climbed to 151.69, resul*ng in
a significant 7.6% deprecia*on against the USD, contradic*ng the hawkish narra*ve
On the contrary, currency markets have defied expecta*ons as the USD/JPY rose to 151.69,
deprecia*ng 7.6% against the USD since YTD, contradic*ng the hawkish narra*ve. This
movement has been primarily driven by the Fed’s dovish delay where rate cuts have been
pushed back, maintaining the yield arbitrage between sovereign bonds across US and Japan
where there is s*ll a 350 bps gap between US 10Y treasury and the benchmark 10Y
government yield. Speculators are paying close aKen*on towards the 152 mark where it
may trigger interven*on from Japan. “We will take appropriate ac*on against excessive
fluctua*ons, without ruling out any op*ons” as Masato Kanda, the Vice Finance minister for
interna*onal affairs men*oned.
(Figure 5: USD/JPY Exchange Rate , Bloomberg Terminal, Date: 01/04/2024)

Traders have also taken bearish posi*ons on the Japanese Yen as the accumulated contracts
for net futures/leveraged fund net futures posi*ons increased to an average nega*ve range
of 70000-80000 post february. Nega*ve net future posi*ons imply greater short trades
compared to longs, sugges*ng short term bearish sen*ment. Overall, the closing divergence
in rate policies between Fed and BOJ will be priced into the USD/JPY in the long term,
however short term specula*on will keep the Yen cheap.
(Figure 6: Net Futures PosiXon including leveraged, Bloomberg News, Date: 24/03/2024)